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Incentives for labour-augmenting innovations in vertical markets: The role of wage rate

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  • Sandrini, Luca

Abstract

This article analyses the link between the wage rate and the incentives to develop and adopt a labour-augmenting innovation in a vertical market. In a model where an upstream monopolist sells the innovation to several downstream manufacturers, I show that the wage rate affects the incentives to innovate in different ways depending on i) the initial level of wage and ii) the timing of the policy’s implementation. Moreover, if the policy is introduced when the size and the price of innovation are common knowledge, then the policy-maker can elicit her preferred equilibrium by nudging more firms to adopt the technology. Instead, if the policy is introduced before the investment stage, then the increase of the wage rate generates two opposite effects: a positive cost-reducing effect and a negative output-contraction effect. If and only if the wage level is below a critical threshold, the former dominates the latter. I argue that, under certain conditions, a policy that raises the price of labour may be beneficial for both the incentives to invest in labour-augmenting innovation and the industry outcomes.

Suggested Citation

  • Sandrini, Luca, 2021. "Incentives for labour-augmenting innovations in vertical markets: The role of wage rate," International Journal of Industrial Organization, Elsevier, vol. 75(C).
    • Handle: RePEc:eee:indorg:v:75:y:2021:i:c:s0167718721000084
    DOI: 10.1016/j.ijindorg.2021.102715
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    More about this item

    Keywords

    Innovation; Vertical markets; Oligopoly; Minimum wage;
    All these keywords.

    JEL classification:

    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives

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