Performance pay, trade and inequality

This paper introduces moral hazard into a standard general equilibrium model with heterogeneous …rms, to study the impact of trade liberalization on wage inequality between identical workers. I show that trade liberalization operates on two margins of inequality, generating betweenand within-…rm wage dispersion. While the former channel has been studied in recent papers, the latter is novel in the literature. In the model, within-…rm wage dispersion increases in …rm productivity as a result of di¤erential intensity in performance-pay compensation across …rms. International trade liberalization generates labor reallocations towards high productivity …rms that result in higher within-…rm inequality.