Trade Liberalization, Monitoring and Wages
This paper incorporates fficiency wages into a model of trade and technology adoption with heterogeneous firms. Worker effort is imperfectly observed by firms. How accurately workers are monitored depends on the monitoring technology a firm adopts. Firms have a binary choice between adopting a basic technology involving low monitoring accuracy and adopting an advanced one involving a higher monitoring accuracy. The most productive firms choose the advanced technology, while less productive firms choose the basic one. This mechanism potentially generates wage differentials across firms such that large firms pay higher wages than small firms. The effects of lower variable trade costs on unemployment and wages are investigated.
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