Time zone difference, skill formation and corrupt informal sector

Abstract

This paper uses competitive general equilibrium model of trade for small open econ omy with informal sector to check the possible efects of virtual trade. We show that skilled labors and educational capital owners benefit from virtual trade. The service sector expands while the formal and informal sector contract along with the number of people engaged in corruption-related intermediation. Following this, we also check the effect of a fall in the extent of cost of corruption. Results show an increase in unskilled wage and outflow of educational capital thus hurting the skill-intensive sector. We proceed further to club the effects of both virtual trade and fall in intermediation cost, and explore the consequences. Though, both skilled and unskilled labors benefit, the effect on output and intermediators, however, is ambiguous. We then modify the basic model to endogenize the cost of corruption, include punishment aspect of intermediators, etc. In this case, owing to time zone difference exploitation, we experience an increase in wage of both types of labor, an expansion of the service sector and contraction of the informal sector. Interestingly, the cost of intermediation rises while the number of intermediators falls in the extended model.