Endogenous factor market distortion, risk aversion, and international trade under input uncertainty

Hamid Beladi and Nancy Chau

Canadian Journal of Economics, 2000, vol. 33, issue 2, 523-539

Abstract: In the context of non-diversifiable and sector-specific risks in labour markets, we show that the resulting factor market distortion - attributable to an endogenous intersectoral wage differential - can provide a possible rationale that explains why larger wage dispersion prevails in developing nations. We also demonstrate how endogenous wage distortions spill over to capital markets, with capital-poor economies offering lower rates of returns. In addition, we show that inequality in the distribution of wealth further deviates factor allocation away from first-best and impairs intersectoral mobility of the poor.

Date: 2000
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