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Imperfect Labour Contracts and International Trade

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  • Grossman, Gene

Abstract

In an economy with imperfect labour contracts, differences in the distribution of human capital are an independent source of comparative advantage. I study a world economy with two sectors, one where output is produced by teams and another where individuals can work alone. When workers' abilities are private information and workers cannot verify the value of output or the level of a firm's profits, feasible labour contracts fail to generate efficient matching of workers within teams. The mismatch of talent on teams is more severe in the country with the more heterogeneous labour force, which generates a comparative disadvantage for this country in team production. Trade exacerbates the 'polarization' of the more diverse society. National income could be raised, and the distribution of income improved, by a marginal expansion in the size of the team sector.

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Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 2240.

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Date of creation: Sep 1999
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Handle: RePEc:cpr:ceprdp:2240

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Related research

Keywords: Comparative Advantage; Diversity; Income Distribution; Labour Contracts; Team Production;

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References

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  1. Rosen, Sherwin, 1981. "The Economics of Superstars," American Economic Review, American Economic Association, vol. 71(5), pages 845-58, December.
  2. Gene M. Grossman & Giovanni Maggi, 1998. "Diversity and Trade," NBER Working Papers 6741, National Bureau of Economic Research, Inc.
  3. Patrick Legros & Andrew F. Newman, 2002. "Monotone Matching in Perfect and Imperfect Worlds," Review of Economic Studies, Oxford University Press, vol. 69(4), pages 925-942.
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  5. Ruffin, Roy J, 1988. "The Missing Link: The Ricardian Approach to the Factor Endowments Theory of Trade," American Economic Review, American Economic Association, vol. 78(4), pages 759-72, September.
  6. Kevin M. Murphy & Andrei Shleifer & Robert W. Vishny, 1990. "The Allocation of Talent: Implications for Growth," NBER Working Papers 3530, National Bureau of Economic Research, Inc.
  7. Paul Krugman, 1995. "Technology, Trade, and Factor Prices," NBER Working Papers 5355, National Bureau of Economic Research, Inc.
  8. Matsuyama, Kiminori, 1992. "A Simple Model of Sectoral Adjustment," Review of Economic Studies, Wiley Blackwell, vol. 59(2), pages 375-88, April.
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  12. Michael Kremer & Eric Maskin, 1996. "Wage Inequality and Segregation by Skill," NBER Working Papers 5718, National Bureau of Economic Research, Inc.
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Cited by:
  1. Strand, Jon, 2003. "The decline or expansion of unions: a bargaining model with heterogeneous labor," European Journal of Political Economy, Elsevier, vol. 19(2), pages 317-340, June.
  2. Bin Xu, 2003. "Trade and financial liberalization with asymmetric information in bank financing," Journal of Economic Policy Reform, Taylor & Francis Journals, vol. 6(2), pages 57-69.

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