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Risk, Selection and Productivity Differences

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  • Wenbiao Cai

Abstract

Two observations about poor countries are puzzling: (1) the majority of their labor force work in agriculture despite significantly higher wage in nonagriculture; (2) labor productivity difference between rich and poor countries is much larger in agriculture than in nonagriculture. This paper argues that these observations are a result of low economy-wide efficiency and incomplete markets to insure against income risk. I formalize this argument in a model that marries two classics: Roy (1951) and Harris and Todaro (1970). The calibrated model generates cross-country difference in labor productivity that is 3 times larger in agriculture than in nonagriculture and account for most of the cross-country variation in nonagriculture wage premium.

Suggested Citation

  • Wenbiao Cai, 2016. "Risk, Selection and Productivity Differences," Departmental Working Papers 2016-02, The University of Winnipeg, Department of Economics.
  • Handle: RePEc:win:winwop:2016-02
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    File URL: http://economics.uwinnipeg.ca/RePEc/winwop/2016-02.pdf
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    References listed on IDEAS

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