Endogenous Comparative Advantage

Andrea Moro and Peter Norman

Scandinavian Journal of Economics, 2019, vol. 121, issue 3, 1088-1124

Abstract: We develop a model of trade between identical countries. Workers endogenously acquire skills that are imperfectly observed by firms; therefore, firms use aggregate country investment as the prior when evaluating workers. This creates an informational externality interacting with general equilibrium effects on each country's skill premium. Asymmetric equilibria with comparative advantages exist even when there is a unique equilibrium under autarky. Symmetric, no‐trade equilibria can be unstable under free trade. Welfare effects are ambiguous: trade can be Pareto‐improving even if it leads to an equilibrium between rich and poor countries, with no special advantage regarding country size.

Date: 2019
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https://doi.org/10.1111/sjoe.12291

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Working Paper: Endogenous Comparative Advantage (2018)
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