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Title. Quantifying the incidence of a global oil price shock in Nigeria: a Roy model with non-homothetic preferences and endogenous transfers

Abstract. In this paper, I develop a general equilibrium Roy model that puts three forces in play: non-homothetic preferences, income effects, and government endogenous transfers through taxation and subsidies. I implement the model in Nigeria in order to evaluate the incidence of the 2016 global oil price shock that hits the Nigerian economy in 2016 and the subsequent removal of oil subsidies, otherwise financed through tax revenues. I find that the oil shock forces a current account adjustment which in turn leads to differentiated negative price adjustments in the other traded sectors, the magnitude of which depend on the sectoral openness to trade. The resulting changes in the relative prices and wages led to a semi-reverse Dutch disease characterized by the expansion of the manufacturing sector and a contraction of the agricultural sector. Further, I show that the shock causes welfare losses that are concentrated in low income groups, as they specialize mostly in the agricultural sector because of their comparative advantages. Next, using a series of government budget-balancing tax and deficit counterfactuals, I first find that the removal of the subsidy was the best response to the shock, and then show that fiscally neutral progressive tax redistribution schemes could lessen the extent of the observed welfare losses particularly on poor population. Finally, I show that not accounting for non-homotheticity generally undervalues the magnitude of the welfare losses.
Keywords: Household welfare, non-homothetic preferences, income-specific price indices, roy allocation | JEL Codes: C8, F6, H2, H5, I3

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