Endogenous Comparative Advantage

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.