Abstract
This paper analyzes how institutional change affects wage inequality. Institutional change is regarded as the reduction of contractual incompleteness. When institutions become better, contracts are less incomplete. Our main finding is that institutional change will narrow down (resp. widen) wage inequality if the share of the surplus in the skilled sector is sufficiently low (resp. high). When introducing incomplete contracts into the framework of skilled-unskilled wage inequality, we can obtain some different insights.
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