Income distribution and the composition of final demand; some new findings for Colombia

A weakness in all of these studies is that the composition of firm size in each industry is not permitted to vary in response to a redistribution of income. This paper examines the importance of such an aggregation bias. Within the framework of a partially closed input-output model for Colombia, the following question is posed. To what extent will a fiscal redistribution favoring the poor be reinforced if the poor (rich) purchase their goods and services exclusively from small (large) firms in every industry? Reinforcement in these circumstances is found to be substantial: a dollar of income transferred to the poor will ultimately raise their incomes by as much as two, or perhaps even three, dollars. There may thus be a high payoff to designing future expenditure surveys that are linked directly to the firm size characteristics of the supplier.