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Trade and the allocation of talent with capital market imperfections

Bonfatti, Roberto; Ghatak, Maitreesh

Authors

Maitreesh Ghatak



Abstract

Trade liberalization in the 1980s and 1990s has been associated with a sharp increase in the skill premium in both developed and developing countries. This is in apparent conflict with neoclassical theory, according to which trade should decrease the relative return on the relatively scarce factor, and thus decrease the skill premium in skill-scarce developing countries. We develop a simple model of trade with talent heterogeneity and capital market imperfections, and show that trade can increase the skill premium in a skill-scarce South that opens up to a skill-abundant North, both in the short run as well as in the long run. We show that trade has two effects: it reduces the skilled wage, and therefore drives non talented agents out of the skilled labor force. It also reduces the cost of subsistence, thereby allowing the talented offspring of unskilled workers to go to school. This compositional effect has a positive effect on the observed skill premium, potentially strong enough to outweigh the decrease in the skilled wage. In our framework, trade liberalization may trigger an increase in the skill-premium in both the North and the South.

Citation

Bonfatti, R., & Ghatak, M. (2013). Trade and the allocation of talent with capital market imperfections. Journal of International Economics, 89(1), (187-201). doi:10.1016/j.jinteco.2012.07.005. ISSN 0022-1996

Journal Article Type Article
Acceptance Date Jul 26, 2012
Online Publication Date Aug 4, 2012
Publication Date Jan 30, 2013
Deposit Date Sep 20, 2018
Publicly Available Date Mar 29, 2024
Journal Journal of International Economics
Print ISSN 0022-1996
Publisher Elsevier
Peer Reviewed Peer Reviewed
Volume 89
Issue 1
Pages 187-201
DOI https://doi.org/10.1016/j.jinteco.2012.07.005
Public URL https://nottingham-repository.worktribe.com/output/1093207
Publisher URL https://www.sciencedirect.com/science/article/pii/S0022199612001316

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