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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.

Suggested Citation

  • Grossman, Gene, 1999. "Imperfect Labour Contracts and International Trade," CEPR Discussion Papers 2240, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:2240
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    References listed on IDEAS

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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. 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.
    3. Evelyn Devadason, 2008. "China and India in World Trade: Are the Asia Giants a Threat to Malaysia?," Global Economic Review, Taylor & Francis Journals, vol. 37(4), pages 447-467.
    4. 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.

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    More about this item

    Keywords

    Comparative Advantage; Diversity; Income Distribution; Labour Contracts; Team Production;
    All these keywords.

    JEL classification:

    • D51 - Microeconomics - - General Equilibrium and Disequilibrium - - - Exchange and Production Economies
    • F11 - International Economics - - Trade - - - Neoclassical Models of Trade

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