Oligopoly and Outsourcing
AbstractWith outsourcing comes a perceived tension between the competitive pressures faced by domestic firms and the effect that outsourcing has on domestic workers. To address this tension, we present a general-equilibrium model with an oligopolistic export sector and a competitive import-competing sector. When there is a minimum wage, an outsourcing tax might be desirable and the usual profit-shifting objectives of an export subsidy are mitigated, perhaps completely, because it might lead to higher unemployment. Also, increased international competition has no affect on the level of outsourcing, but the direction of its effect on unemployment and national income depends on the relative factor intensities of the two sectors. Under wage flexibility, an outsourcing tax cannot be justified and the profit-shifting motive is the same as in a model without outsourcing. Further, if export subsidies are not possible due to WTO regulations, it is optimal to subsidize rather than to tax outsourcing. Finally, the effect of increased foreign competition on welfare depends on the relative factor intensities of the two sectors.
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Bibliographic InfoPaper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 1892.
Length: 26 pages
Date of creation: Dec 2005
Date of revision:
Publication status: published in: Economics and Politics, 2007, 19 (2), 219-234
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Other versions of this item:
- Subhayu Bandyopadhyay & Howard J. Wall, 2005.
"Oligopoly and Outsourcing
[Oligopoly and OUtsourcing]," Working Papers 05-09 Classification-, Department of Economics, West Virginia University.
- F1 - International Economics - - Trade
- F2 - International Economics - - International Factor Movements and International Business
- J3 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs
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- Michael Hübler, 2007. "A Simple Model of Outsourcing with Cournot Competition," Kiel Working Papers 1320, Kiel Institute for the World Economy.
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