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Endogenous Comparative Advantage

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  • Moro, Andrea
  • Norman, Peter

Abstract

We develop a model of trade between identical countries. Workers endogenously acquire skills that are imperfectly observed by firms, who therefore use aggregate country investment as the prior when evaluating workers. This creates an informational externality interacting with general equilibrium effects on each country’s skill premium. Asymmetric equilibria with comparative advantages exist 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 equilibrium with rich and poor countries, with no special advantage to country size.

Suggested Citation

  • Moro, Andrea & Norman, Peter, 2005. "Endogenous Comparative Advantage," MPRA Paper 88779, University Library of Munich, Germany, revised 01 Mar 2018.
    • Handle: RePEc:pra:mprapa:88779
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    References listed on IDEAS

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    Cited by:

    1. Xin Wang, 2022. "Multinational firms and human capital investment: A dynamic knowledge‐capital model," The World Economy, Wiley Blackwell, vol. 45(5), pages 1564-1586, May.

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    More about this item

    Keywords

    Trade; Specialization; Human Capital; Reputation;
    All these keywords.

    JEL classification:

    • D62 - Microeconomics - - Welfare Economics - - - Externalities
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • F11 - International Economics - - Trade - - - Neoclassical Models of Trade
    • O12 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Microeconomic Analyses of Economic Development

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