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Globalization, product differentiation and wage inequality

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  • Paulo Bastos

    ()
    (Research Department, Inter-American Development Bank)

  • Odd Rune Straume

    ()
    (Universidade do Minho - NIPE)

Abstract

This paper develops a two-country, general equilibrium model of oligopoly in which the degree of horizontal product differentiation is endogenously determined by firms' strategic investments in product innovation. Consumers seek variety and product innovation is more skill intensive than production. Greater import competition increases innovation incentives, and thereby the relative demand for skill. An intraindustry trade expansion following trade liberalization can therefore increase wage inequality between skilled and unskilled workers. In addition, since product differentiation is resource consuming, freer trade entails a potential trade-off between production and variety. The import competition effect highlighted by the model, which plays a key role in determining the general equilibrium, is supported by panel data on Chilean manufacturing plants.

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Bibliographic Info

Paper provided by NIPE - Universidade do Minho in its series NIPE Working Papers with number 8/2010.

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Date of creation: 2010
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Handle: RePEc:nip:nipewp:8/2010

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Postal: Núcleo de Investigação em Políticas Económicas, Escola de Economia e Gestão, Universidade do Minho, P-4710-057 Braga, Portugal
Phone: +351-253604510 ext 5532
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Web page: http://www3.eeg.uminho.pt/economia/nipe/versao_inglesa/index_uk.htm
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Keywords: Trade liberalization; Product differentiation; Innovation; Wage Inequality; General Oligopolistic Equilibrium.;

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References

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Citations

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Cited by:
  1. Udo Kreickemeier & Frode Meland, . "International Trade, Union Wage Premia, and Welfare in General Equilibrium," Discussion Papers 11/05, University of Nottingham, GEP.
  2. Atif, Syed Muhammad, 2012. "Critical Review of 'A Simple Model of Firm Heterogeneity, International Trade and Wages'," MPRA Paper 42334, University Library of Munich, Germany.
  3. Colacicco, Rudy, 2012. "The "Average" Within-Sector Firm Heterogeneity in General Oligopolistic Equilibrium," MPRA Paper 40212, University Library of Munich, Germany.
  4. Dutta, Meghna & Kar, Saibal & Marjit, Sugata, 2013. "Product variety, finite changes and wage inequality," Economic Modelling, Elsevier, vol. 35(C), pages 610-613.
  5. Rudy Colacicco, 2013. "Strategic Trade Policy in General Oligopolistic Equilibrium," FIW Working Paper series 126, FIW.

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