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

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

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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. Grossmann, G.M. & Maggi, G., 1998. "Diversity and Trade," Papers 192, Princeton, Woodrow Wilson School - Public and International Affairs.
  3. Krugman, Paul R., 2000. "Technology, trade and factor prices," Journal of International Economics, Elsevier, vol. 50(1), pages 51-71, February.
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  10. Mussa, Michael, 1982. "Imperfect factor mobility and the distribution of income," Journal of International Economics, Elsevier, vol. 12(1-2), pages 125-141, February.
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Cited by:

  1. 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.
  2. 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.
  3. Jansen, Marion, 2000. "International trade and the position of European low-skilled labour," WTO Staff Working Papers ERAD-2000-01, World Trade Organization (WTO), Economic Research and Statistics Division.

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