Imperfect Labor Contracts and International Trade
AbstractIn 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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Date of creation: Jan 1999
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Other versions of this item:
- Grossman, G.M., 1998. "Imperfect Labour Contracts and International Trade," Papers 205, Princeton, Woodrow Wilson School - Public and International Affairs.
- Grossman, Gene, 1999. "Imperfect Labour Contracts and International Trade," CEPR Discussion Papers 2240, C.E.P.R. Discussion Papers.
- F11 - International Economics - - Trade - - - Neoclassical Models of Trade
- D51 - Microeconomics - - General Equilibrium and Disequilibrium - - - Exchange and Production Economies
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