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Imperfect Labor Contracts and International Trade

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Gene M. Grossman

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Abstract

In an economy with imperfect labor 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 labor contracts fail to generate efficient matching of workers within teams. The general equilibrium has the most talented workers opting for individualistic activities, while their less talented compatriots join teams. The team mismatches are more severe in the country with the more heterogeneous labor 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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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 6901.

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Date of creation: Jan 1999
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Handle: RePEc:nbr:nberwo:6901

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Find related papers by JEL classification:
F11 - International Economics - - Trade - - - Neoclassical Models of Trade
D51 - Microeconomics - - General Equilibrium and Disequilibrium - - - Exchange and Production Economies

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  4. Legros, Patrick & Newman, Andrew, 2000. "Monotone Matching In Perfect And Imperfect Worlds," CEPR Discussion Papers 2396, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  5. Malcomson, James M, 1981. "Unemployment and the Efficiency Wage Hypothesis," Economic Journal, Royal Economic Society, vol. 91(364), pages 848-66, December. [Downloadable!] (restricted)
  6. Mussa, Michael, 1982. "Imperfect factor mobility and the distribution of income," Journal of International Economics, Elsevier, vol. 12(1-2), pages 125-141, February. [Downloadable!] (restricted)
  7. Michael Kremer & Eric Maskin, 1996. "Wage Inequality and Segregation by Skill," NBER Working Papers 5718, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  8. Milgrom, Paul & Roberts, John, 1990. "The Economics of Modern Manufacturing: Technology, Strategy, and Organization," American Economic Review, American Economic Association, vol. 80(3), pages 511-28, June. [Downloadable!] (restricted)
  9. Grossmann, G.M. & Maggi, G., 1998. "Diversity and Trade," Papers 192, Princeton, Woodrow Wilson School - Public and International Affairs.
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  13. Clemenz, Gerhard, 1995. " Adverse Selection in Labor Markets and International Trade," Scandinavian Journal of Economics, Blackwell Publishing, vol. 97(1), pages 73-88, March.
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