NBER WORKING PAPER SERIES FACTOR PRICES AND WELFARE UNDER.pdfVIP

NBER WORKING PAPER SERIES FACTOR PRICES AND WELFARE UNDER INTEGRATED CAPITAL MARKETS Carol L. Osler Working Paper No. 2447 NATIONAL BUREAU OF ECONOMIC RESEARCH 1050 Massachusetts Avenue Cambridge, MA 02138 November 1987 The research reported here is part of the NBERs research program in International Studies. Any opinions expressed are those of the author and not those of the National Bureau of Economic Research. NBER Working Paper #2447 November 1987 Factor Prices and Welfare Under Integrated Capital Markets ABSTRACT This paper considers the effect on factor prices and welfare of trade between economies whose production is characterized by nation-specific technological uncertainty. The analysis is carried out using a two-country Diamond overlapping-generations model in which technological uncertainty is reflected in factor prices, and equities refer to claims on the returns to capital. \Ve find that trade in capital is complementary to trade in commodities, in the sense that adding free trade in capital to the spectrum of permitted economic activities will cause significant changes in wages, output, and capital returns. Furthermore, for countries which are identical, or not very different, factor prices move in parallel when free trade in capital is introduced. Specifically, as we show in the text, capital returns fall, while wages rise, in both countries. These results are based on the portfolio diversification permitted by international capital market integration: the reduction of