International Outsourcing under Monopolistic Competition: Winners and Losers
AbstractWe show that, even with flexible domestic wages, international outsourcing may worsen the welfare of the home country and reduce the profits of all firms. If wages are rigid, outsourcing is welfare-improving if and only if the sum of the “trade creation” effect and the “exploitation effect” exceeds the “trade diversion” effect. A wage subsidy may improve welfare. We also extend the model to a two-period framework. Delaying outsourcing can be gainful because the fixed cost of outsourcing may fall over time. A social planner would choose a different speed of outsourcing than that achieved under laissez-faire.
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Bibliographic InfoPaper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 2034.
Date of creation: 2007
Date of revision:
offshoring; outsourcing; international trade; wage rigidity; monopolistic competition;
Other versions of this item:
- Ngo Van Long & Viet Do, 2007. "International Outsourcing under Monopolistic Competition: Winners and Losers," Departmental Working Papers 2007-06, McGill University, Department of Economics.
- F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies
- F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
- F16 - International Economics - - Trade - - - Trade and Labor Market Interactions
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