Trade and inequality in an overlapping generations model with capital accumulation

Abstract We study the lifecycle aspect of within‐country inequality that stems from capital and labor services supplied by individuals. Our environment is a combination of a multicountry trade model and an overlapping generations model with production and capital accumulation. Trade liberalization increases the measured total factor productivity in each country, which increases the marginal product of capital and incentivizes capital accumulation. Higher capital stock and higher measured productivity raise the marginal product of labor and, hence, wages. Inequality, measured by the ratio of old agents' income to young agents' income, evolves over time due to capital accumulation during the transition from autarky to an open‐economy world. Immediately after liberalization, inequality increases. Over time, capital accumulates at a diminishing rate and inequality declines.