On Additional Conditions for Factor Price Equalization in Intertemporal Heckscher-Ohlin Models

Abstract

The examination of the theoretical conditions for and the empirical evidence of factor prize equalization have a long history. Over the past five decades researchers have found quite a few conditions that need to be met in order for factor prizes to be equal internationally. Recently, this condition was examined in the context of endogenous growth models. As Wälde (1994) shows, the intertemporal setting has further complicated the set of conditions under which this factor price equalization is guaranteed. However, as it is now well understood that research and development activities and the related growth of innovations are crucial for economic growth, the question arises whether this had further consequences for our thinking about the equalization of factor prizes. As we show in this paper, the fact that firms have to engage in research and development causes indeed an additional condition that has to be met in order for factor prize equalization to hold. We also examine the role of time preferences and show that despite different time preference rates factor price equalization can still occur if there is perfect capital mobility.