Uncertain lifetimes and convergence in a two-country Heckscher–Ohlin model

Abstract

In a two-country infinite-horizon model, with two traded goods and two factors of production and no international borrowing and lending, there is no convergence of incomes if there is factor-price equalization. With factor-price equalization, the Euler equations of the two economies become identical. I show that in such a setup if agents have a non-zero probability of death, then we do get convergence. In the steady state the two economies have identical capital-labor ratios and revert to autarky.

Convergence and Overtaking in a Dynamic two Country Model

“…Brecher, Chen and Choudhri (2002), Chatterjee and Shukayev (2012) Both these classes of models follow Trefler (1993) who argued that a different form of the factor-price-equalization theorem that allows for factor-augmenting international productivity differences is empirically consistent with observed cross-country variation in factor prices. Finally, the result has been shown to depend crucially on agents being infinitely lived- Sen (2015) shows that in a Blanchard-Yaari model, convergence indeed occurs. Ventura (1997) had assumed that there was incomplete specialization and obtained conditional convergence.…”

“…These figures are taken from Laitner (2000). x A small open economy model is discussed in Sen (2013). In a small open economy model factor-price equalization follows-in our two-country model, this happens only in the steady state.…”

“…Note that this does not change the stability of the model, or its (qualitative) dynamics. xxiv The issue of land availability on the development path of a small open economy is discussed in Sen (2013).…”

Convergence and Overtaking in a Dynamic Two Country Model

“…viii Both these classes of models follow Trefler (1993) who argued that a different form of the factor-price-equalization theorem that allows for factor-augmenting international productivity differences is empirically consistent with observed cross-country variation in factor prices. Finally, the result has been shown to depend crucially on agents being infinitely lived- Sen (2015) shows that in a Blanchard-Yaari model, convergence indeed occurs. Ventura (1997) had assumed that there was incomplete specialization and obtained conditional convergence.…”