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Does Demand Uncertainty Infl uence Location of Industry?

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Abstract

The analysis presented in this paper shows that in countries with relatively high wages risk-averse fi rms operating in perfectly competitive markets will reduce production of commodities with high uncertainty of demand. Such commodities will be produced mainly in countries having suffi ciently lower labor costs. Thus, an increase in demand uncertainty may shift the production from developed to developing countries even though additional per unit transaction and transportation costs in the latter offset the advantage of lower wages. The predictions of the model are then checked through an analysis of the toy industry concerning the level of demand uncertainty and location of outsourced production activities.

Suggested Citation

  • Baniak, Andrzej & Cukrowski, Jacek & Dunin-Wasowicz, Stefan, 2006. "Does Demand Uncertainty Infl uence Location of Industry?," Economia Internazionale / International Economics, Camera di Commercio Industria Artigianato Agricoltura di Genova, vol. 59(4), pages 419-435.
  • Handle: RePEc:ris:ecoint:0069
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    Keywords

    Demand uncertainty; risk aversion; production allocation;

    JEL classification:

    • D20 - Microeconomics - - Production and Organizations - - - General
    • D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
    • L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General

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