Abstract
This paper examines the implications of efficiency wages for international trade in a simple extension of the Ricardian model, in which labour performs two different tasks in production, and where workers are imperfectly monitored in the performance of one of the tasks. As a result of the factor market distortion, the one-factor economy may behave like a Heckscher-Ohlin model. An important result is that transfers of income have efficiency-reducing effects, and hence the standard aggregate analysis of trade policy may be inappropriate.
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