Imperfect Labour Contracts and International Trade

Gene Grossman ()

No 2240, CEPR Discussion Papers from C.E.P.R. Discussion Papers

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.

Keywords: Comparative Advantage; Diversity; Income Distribution; Labour Contracts; Team Production (search for similar items in EconPapers)
JEL-codes: D51 F11 (search for similar items in EconPapers)
Date: 1999-09

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Related works:
Working Paper: Imperfect Labour Contracts and International Trade (1998)
Working Paper: Imperfect Labor Contracts and International Trade (1999)
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