Imperfect Labor Contracts and International Trade

Gene Grossman ()

No 6901, NBER Working Papers from National Bureau of Economic Research, Inc

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.

JEL-codes: F11 D51 (search for similar items in EconPapers)
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Date: Written
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Related works:
Working Paper: Imperfect Labour Contracts and International Trade (1998)
Working Paper: Imperfect Labour Contracts and International Trade (1999)
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