The Distribution of Talent and the Pattern and Consequences of International Trade

In an economy with imperfect labor contracts, differences in the distribution of talent can be an independent source of comparative advantage. I study a world economy with two activities, one in which an individual's contribution to production can be measured accurately and another in which workers engage in joint production. When individuals have private information about their own talents, the most able workers self-select into the occupation in which their reward best reflects their own performance. I describe an equilibrium in which the country with a more heterogeneous labor force exports the good that is produced by the most talented individuals. In this country, trade exacerbates the polarization of labor and often worsens the distribution of income.