Endogenous Inequality in a Trade Model with Private Information

SSRI Working Paper No. 2028

31 Pages Posted: 19 Dec 2000

See all articles by Peter Norman

Peter Norman

University of British Columbia - Department of Economics

Andrea Moro

Vanderbilt University - College of Arts and Science - Department of Economics

Date Written: March 1, 2001

Abstract

We develop a general equilibrium model of trade between identical countries. The model is similar to a 2x2x2 Heckser-Ohlin model, but the factors of production, skilled and unskilled labor, are endogenously determined from human capital investments by the workers. Firms are only able to observe human capital investments with noise, which creates an informational externality. Due to interaction between the informational externality and general equilibrium effects, equilibria arise where countries specialize as rich, high-tech, countries and poor, low-tech, countries respectively, also when there is a unique autharky equilibrium. Protectionism may make the poor country better off, but we can construct examples where the efficiency gains are large enough to make the specialization equilibrium better than the unique autharky equilibrium also for the poor country.

Keywords: International trade, private information, inequality, specialization, human capital, informational externality

JEL Classification: D58, D62, D82, J41, J71

Suggested Citation

Norman, Peter and Moro, Andrea, Endogenous Inequality in a Trade Model with Private Information (March 1, 2001). SSRI Working Paper No. 2028, Available at SSRN: https://ssrn.com/abstract=253697 or http://dx.doi.org/10.2139/ssrn.253697

Peter Norman (Contact Author)

University of British Columbia - Department of Economics ( email )

2329 West Mall
Vancouver, British Columbia BC V6T 1Z2
Canada
(604) 822-2839 (Phone)

HOME PAGE: http://faculty.arts.ubc.ca/pnorman/

Andrea Moro

Vanderbilt University - College of Arts and Science - Department of Economics ( email )

Box 1819 Station B
Nashville, TN 37235
United States

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