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Permanent uncertainty, employment protection, and firms'location

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  • Sophie Lecostey

    (University of Caen Basse-Normandie - CREM UMR CNRS 6211)

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    Abstract

    It is often argued that firms need flexibility in order to better face demand uncertainty. As employment protection legislation (EPL) impacts the cost of volume adjustments available to firms, it constrains the volume flexibility that they can achieve. Weakening EPL might thus be thought of as a desirable policy, in particular for when firms are deciding where to locate. On the other hand, it is well known that in an oligopolistic setting, flexibility is not necessarily an advantage. The aim of this paper is to analyze the consequences that different EPL regimes may have on firms' location decisions. It shows that the country characterized by the strongest EPL can nevertheless attract firms under demand uncertainty (either in an agglomeration equilibrium, or in a dispersion equilibrium), and highlights the respective and combined roles played by trade costs and strategic interaction. Moreover, it shows that if firms compete in prices, they will never agglomerate in the country with the lowest EPL.

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    Bibliographic Info

    Paper provided by Center for Research in Economics and Management (CREM), University of Rennes 1, University of Caen and CNRS in its series Economics Working Paper Archive (University of Rennes 1 & University of Caen) with number 201240.

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    Date of creation: Nov 2012
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    Handle: RePEc:tut:cremwp:201240

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    Postal: CREM (UMR CNRS 6211) - Faculty of Economics, 7 place Hoche, 35065 Rennes Cedex - France
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    Related research

    Keywords: oligopoly; strategic behavior; commitment; flexibility; employment protection; trade costs; firms'location;

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    1. Dewit, Gerda & Dermot Leahy & Catia Montagna, 2003. "Employment protection and globalisation in dynamic oligopoly," Royal Economic Society Annual Conference 2003 57, Royal Economic Society.
    2. Gerda Dewit & Holger Görg & Catia Montagna, 2009. "Should I stay or should I go? Foreign direct investment, employment protection and domestic anchorage," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 145(1), pages 93-110, April.
    3. Haaland, J.I. & Wooton, I., 2000. "Multinational Firms: Easy Come, Easy Go?," Papers 19/00, Norwegian School of Economics and Business Administration-.
    4. James Brander & Paul Krugman, 1980. "A "Reciprocal Dumping" Model of International Trade," Working Papers 405, Queen's University, Department of Economics.
    5. Dewit, Gerda & Leahy, Dermot & Montagna, Catia, 2012. "Employment Protection, Flexibility and Firms’ Strategic Location Decisions under Uncertainty," SIRE Discussion Papers 2012-24, Scottish Institute for Research in Economics (SIRE).
    6. Haufler, Andreas & Wooton, Ian, 2010. "Competition for firms in an oligopolistic industry: The impact of economic integration," Journal of International Economics, Elsevier, vol. 80(2), pages 239-248, March.
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