How Robust is the Skill-Dispersion-Complementarity Hypothesis?

We examine the empirical robustness of the hypothesis that countries with higher skill dispersion specialize in sectors characterized by a submodular production function.

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Abstract. We explore the robustness of the hypothesis, First put forward by Grossman and Maggi (2000) (GM), that countries with higher skill dispersion specialize in the sector characterized by a submodular production function, i.e. the industry that cross-matches workers of different skills (henceforth referred to as SDC hypothesis). We relax the assumption of constant returns to skill, breaking the link between submodularity and the concavity of isoquants, a key feature in GM. We show that when a submodular sector displays convex isoquants, it no longer benefits from higher skill dispersion and higher skill dispersion countries may specialize in the supermodular sector. We investigate this theoretical possibility by performing a variety of simulations, based on empirical skill distributions, and find that in the vast majority of cases the SDC hypothesis is not violated.

Citation

@misc{bombardini2015robust,
  title={How Robust is the Skill-Dispersion-Complementarity Hypothesis?},
  author={Bombardini, Matilde and Gallipoli, Giovanni and Pupato, Germ{\'a}n},
  year={2015}
}