Endogenous factor market distortion, risk aversion, and international trade under input uncertainty

In the context of non-diversifiable and sector-specific risks in labour mar kets, we show that the resulting factor market distortion - attributable to an endogenous intersectoral wage differential - can provide a possible rat ionale that explains why larger wage dispersion prevails in developing nati ons. We also demonstrate how endogenous wage distortions spill over to capi tal markets, with capital-poor economies offering lower rates of returns. I n addition, we show that inequality in the distribution of wealth further d eviates factor allocation away from first-best and impairs intersectoral mo bility of the poor.