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Rural-urban wage differential, rent seeking, and a justification for free trade

Authors
Journal
Journal of Urban Economics
0094-1190
Publisher
Elsevier
Publication Date
Volume
26
Issue
3
Identifiers
DOI: 10.1016/0094-1190(89)90006-5

Abstract

Abstract In the well-known model of rural-urban wage differentials, analyzed by E. E. Hagen ( Quart. J. Econom., 72, 496–514 (1958)) among others, free trade was shown to be inferior to autarky. The present paper demonstrates that if rents, implicit in the wage differential, are dissipated via rent-seeking activities, the case for free trade can be fully restored. The reason for the reversal of the orthodox policy intuition is that when rents are dissipated, market prices adequately reflect social opportunity costs of production, despite the presence of a wage distortion.

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