INTERNATIONAL RESOURCE ALLOCATION: Trade with Incomplete Information 2

The probability of a successful match equals 1 for z, = 0, and, if i|r is smaller than 1, declines as \zt\ rises, becoming constant at 1/2 for all |z,|’s higher than (l-i|;)/2: only when an individual’s domestic alternative yields a low return (|z,| is low) is the bargaining power generated by access to cheap labor sufficient to increase the range of acceptable foreign partners.

becomes acceptable, and P increases.
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A successful international match generates labor demand equal. If home labor is cheaper, i.e., ф is smaller than 1, all the international demand will fall on home labor. The presence of z,* in this labor demand expression indicates that “transfer of labor demand” from foreign to home is taking place. Using (7), we can then derive expected total home labor demand as the sum of labor demand from domestic and international matches: