5. Factor Market Distortions and the Shape of the Transformation Curve*
General equilibrium theorists customarily assume that factor and goods markets are characterized by perfect competition. Recently, however, an interest has developed in the economic effects of distortions in factor markets, such that the price of a factor’s services is higher in one sector of the economy than it is in another. Such distortions may be the result of taxation, specifically of corporate income taxation which raises the cost of capital in the corporate sector above its cost in the non-corporate sector (see Harberger[5]; of existence of a differential between wages in the industrial and the subsistence sector of an underdeveloped country (see Hagen[4]; of the ...
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