The “Big Push“ of International Trade: A Tale of Informality and Human Capital

Francesco D’Ascanio () and Tomas Martinez
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Francesco D’Ascanio: University of Hohenheim

No 139, Bank of Lithuania Working Paper Series from Bank of Lithuania

Abstract: Informality is pervasive in many developing economies and is often accompanied by lowinvestment in human capital. We study the effects of international trade through the lens of a model with heterogeneous firms and workers, featuring labor market frictions. Complementarity between workers’ human capital investment decisions and firms’ hiring strategies can give rise to multiple equilibria. In the “bad†equilibrium, informality have stronger incentives to formalize and workers invest more in human capital. We show that, under certain conditions, trade can act as a coordinating device that shifts the economy toward the good equilibrium. The novel mechanism we uncover involves effort in human capital investment as a key margin of adjustment to trade shocks.

Keywords: Big Push; human capital; informality; international trade; multiple equilibria (search for similar items in EconPapers)
JEL-codes: E24 F12 F16 J24 J46 O17 (search for similar items in EconPapers)
Pages: 39 pages
Date: 2026-01-09
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