Jonathan Dingel, University of Chicago, Booth
Abstract: This paper shows that welfare inequality in a trading network is greater when productivities are rearranged such that neighboring locations are more similar. An increase in the spatial correlation of productivities amplifies cross-country welfare dispersion by increasing the correlation between productivity and the gains from trade. To empirically examine this prediction, we study how global agricultural trade responds to exogenous changes in the spatial correlation of agricultural productivity driven by a naturally occurring global climatic phenomenon. As predicted, higher spatial correlation in cereal yields increases the correlation between productivity and the gains from trade. In a forecasting application, climate-change projections for 2099 that incorporate this general-equilibrium effect exhibit substantially greater global welfare inequality, with higher welfare losses across most of Africa.