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Labour policy and multinational firms: the "race to the bottom" revisited

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  • Bhattacharya, Anindya
  • Sen, Debapriya

Abstract

This paper revisits the "race to the bottom" phenomenon in a simple game theoretic framework. We consider two countries and one multinational firm, which requires two inputs that are imperfect substitutes. In the benchmark model the labour of each country specializes in a distinct input. Seeking to maximize their labour incomes, countries simultaneously announce wages following which the firm chooses its labour employment in each country. We show that "race to the bottom" (countries setting minimum possible wages) is never an equilibrium. Moreover there are equilibria with ``race to the top", that is, countries set maximum possible wages. This result is robust in an extended model where prior to competing in wages, each country can make input-specific investments to make its labour available for one or both inputs. Provided the production function of the firm is not asymmetrically intensive in either one of the two inputs, there are equilibria of the extended game with specialization (that is, countries invest in distinct inputs) as well as "race to the top".

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  • Bhattacharya, Anindya & Sen, Debapriya, 2018. "Labour policy and multinational firms: the "race to the bottom" revisited," MPRA Paper 87858, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:87858
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    Cited by:

    1. Koichi Fukumura & Atsushi Yamagishi, 2020. "Minimum wage competition," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 27(6), pages 1557-1581, December.
    2. Mingxiong Bi & Chencheng Wang & Dian Fu & Xun Tan & Shurong Yu & Junbai Pan & Kun Lv, 2022. "Chinese-Style Fiscal Decentralization, Ecological Attention of Government, and Regional Energy Intensity," Energies, MDPI, vol. 15(22), pages 1-28, November.

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    More about this item

    Keywords

    race to the bottom; race to the top; labour policy; multinational; CES (constant elasticity of substitution);
    All these keywords.

    JEL classification:

    • F63 - International Economics - - Economic Impacts of Globalization - - - Economic Development
    • J42 - Labor and Demographic Economics - - Particular Labor Markets - - - Monopsony; Segmented Labor Markets
    • O12 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Microeconomic Analyses of Economic Development

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