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Does Demand Uncertainty Infl uence Location of Industry?




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.

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  • 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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    References listed on IDEAS

    1. M. H. Pesaran, 1974. "On the General Problem of Model Selection," Review of Economic Studies, Oxford University Press, vol. 41(2), pages 153-171.
    2. Kremers, Jeroen J M & Ericsson, Neil R & Dolado, Juan J, 1992. "The Power of Cointegration Tests," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 54(3), pages 325-348, August.
    3. Mizon, Grayham E & Richard, Jean-Francois, 1986. "The Encompassing Principle and Its Application to Testing Non-nested Hypotheses," Econometrica, Econometric Society, vol. 54(3), pages 657-678, May.
    4. Godfrey, L. G. & Pesaran, M. H., 1983. "Tests of non-nested regression models: Small sample adjustments and Monte Carlo evidence," Journal of Econometrics, Elsevier, vol. 21(1), pages 133-154, January.
    5. Fisher, Gordon R. & McAleer, Michael, 1981. "Alternative procedures and associated tests of significance for non-nested hypotheses," Journal of Econometrics, Elsevier, vol. 16(1), pages 103-119, May.
    6. Davidson, Russell & MacKinnon, James G, 1981. "Several Tests for Model Specification in the Presence of Alternative Hypotheses," Econometrica, Econometric Society, vol. 49(3), pages 781-793, May.
    7. Jeffrey A. Frankel & Shang-Jin Wei, 1994. "Yen Bloc or Dollar Bloc? Exchange Rate Policies of the East Asian Economies," NBER Chapters,in: Macroeconomic Linkage: Savings, Exchange Rates, and Capital Flows, NBER-EASE Volume 3, pages 295-333 National Bureau of Economic Research, Inc.
    8. Pesaran, M. Hashem & Shin, Yongcheol, 1996. "Cointegration and speed of convergence to equilibrium," Journal of Econometrics, Elsevier, vol. 71(1-2), pages 117-143.
    9. Agnès Bénassy-Quéré, 1996. "Exchange Rate Regimes and Policies in Asia," Working Papers 1996-07, CEPII research center.
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    More about this item


    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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