Endogenous Factor Market Distortion, Risk Aversion, and International Trade Under Input Uncertainty
Posted: 26 Oct 2000
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.
JEL Classification: F10
Suggested Citation: Suggested Citation