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Terms-of-Trade Uncertainty, Incomplete Markets and Unemployment

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  • Fernandez, Raquel

Abstract

This paper examines a two-sector small open economy that is subject to shocks in its terms-of-trade. Risk-neutral entrepreneurs use implicit contracts to insure risk-averse workers against fluctuations in their income. The characteristics of these contracts are examined within a general framework and the implications for employment, wages, and utility of different realizations of relative prices are analyzed. The implicit contract equilibrium is shown to be constrained Pareto optimal when the social planner is unable to provide income directly to unemployed workers. Copyright 1992 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

Suggested Citation

  • Fernandez, Raquel, 1992. "Terms-of-Trade Uncertainty, Incomplete Markets and Unemployment," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 33(4), pages 881-894, November.
  • Handle: RePEc:ier:iecrev:v:33:y:1992:i:4:p:881-94
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    Cited by:

    1. Donald R. Davis & Trevor A. Reeve, 1997. "Human Capital, Unemployment, and Relative Wages in a Global Economy," NBER Working Papers 6133, National Bureau of Economic Research, Inc.
    2. Eckhard Janeba, 2009. "Exports, unemployment, and the welfare state," Canadian Journal of Economics, Canadian Economics Association, vol. 42(3), pages 930-955, August.
    3. Xinpeng Xu & Yu Sheng, 2014. "Terms of Trade Shocks and Endogenous Search Unemployment: A Two-Sector Model with Non-Traded Goods," Pacific Economic Review, Wiley Blackwell, vol. 19(2), pages 201-215, May.
    4. repec:got:cegedp:60 is not listed on IDEAS
    5. Ranjan, Priya, 2016. "Globalization and risk averse workers: The roles of labor market and trade policies," Journal of International Economics, Elsevier, vol. 103(C), pages 64-79.

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