Income differences and input-output structure

Harald Fadinger, Christian Ghiglino, Mariya Teteryatnikova

Publications: Working paper

Abstract

We consider a multi-sector general equilibrium model with IO linkages, sector-specific productivities and tax rates. Using tools from network theory, we investigate how the IO structure interacts with productivities and taxes in the determination of aggregate income. We show that aggregate income is a simple function of the first and second moments of the distribution of the IO multipliers, sectoral productivities and sectoral tax rates. We then estimate the parameters of the model to their joint empirical distribution. Poor countries have more extreme distributions of IO multipliers than rich economies: there are a few high-multiplier sectors, while most sectors have very low multipliers; by contrast, rich countries have more sectors with intermediate multipliers. Moreover, the correlations of these with productivities and tax rates are positive in poor countries, while being negative in rich ones. The estimated model predicts cross-country income differences extremely well, also out-of-sample. Finally, we perform a number of counterfactuals and compute optimal tax rates.
Original languageEnglish
Number of pages62
Publication statusPublished - Sep 2015

Publication series

SeriesVienna Economics Papers
NumberNo.1510

Austrian Fields of Science 2012

  • 502008 Development economics
  • 502018 Macroeconomics

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