Trade induced convergence through human capital accumulation in credit-constrained economies

Trade and the allocation of talent with capital market imperfections

“…8 We borrow from this literature the basic insight that, in the presence of credit constraints, trade may increase the supply of skilled labor in the South. In particular, our result that trade may shift South from a low-skill equilibrium to a high-skill equilibrium in the long run has much in common with the results in Ranjan (2003). Our main innovation lies in the introduction of the kind of talent heterogeneity that maps into heterogeneity in productivity per worker.…”

“…It follows that all and only the talented agents go to school after trade is opened, and the economy moves to the good steady state in period T +1. 30 The result that trade may move the unskilled labor-abundant country from a low human capital equilibrium to a high human capital equilibrium is very similar to the results found by Ranjan (2003). More generally, that trade may lead to an increase in school enrollment among the offspring of unskilled workers is a key result in the literature on trade with credit market frictions and trade, beginning with Cartiglia (1997).…”

“…21 For example, Ranjan (2003) assumes a continuously decreasing marginal utility of income, which, coupled with the inability to borrow from financial markets, implies that the participation constraint of the poor is less likely to be satisfied than that of the rich. Our innovation is that we model the marginal utility of income as decreasing at a single point of the income distribution -infinite at the level of income that is needed to pay for subsistence, constant and equal to 1 thereafter.…”

“…This effect may be large enough to offset the standard result that trade discourages the accumulation of the scarce factor (via the Stolper-Samuelson decrease in its relative return; see Findlay andKierzkowski, 1983, andGrossman andHelpman, 1991), thus creating a positive association between trade liberalization and skill accumulation in the South. Ranjan (2001aRanjan ( , 2003 enriches the setting in Cartiglia (1997) by studying how trade may affect credit constraints also through the distribution of income and wealth. The main intuition here is that trade increases (decreases) the wage income and long-run wealth of unskilled workers in the South (North).…”

“…8 Our paper is also related to the literature on trade, credit constraints and child labor, see in particular Ranjan (2001b). 9 Ranjan (2003) and Chesnokova and Krishna (2009) assume talent heterogeneity that maps into heterogeneity in the cost of education. While yielding similar predictions for the impact of trade on the supply of skilled labor, this approach is not well-suited to investigate the impact of trade on the average productivity of the skilled labor force.…”