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Imperfect Labor Contracts and International Trade

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  • Gene M. Grossman

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.

Suggested Citation

  • Gene M. Grossman, 1999. "Imperfect Labor Contracts and International Trade," NBER Working Papers 6901, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:6901
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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. 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.

    More about this item

    JEL classification:

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

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