Endogenous Comparative Advantage

by Andrea Moro and Peter Norman.
Working paper : PDF
We develop a stylized model of trade between identical countries. The departure from neoclassical theory is that endogenous human capital investments are imperfectly observed. Investments have a public good component: firms use aggregate country investment as the prior when evaluating workers, which creates an informational externality. The interaction between this externality and general equilibrium effects creates asymmetric equilibria with comparative advantages even when there is a unique equilibrium under autarky. Symmetric, no-trade equilibria may be unstable under free trade. Welfare effects are ambiguous: trade may be Pareto improving even if it leads to an asymmetric equilibrium with rich and poor countries.


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