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Chapter 18 International Outsourcing Under Monopolistic Competition: Winners and Losers

In: Contemporary and Emerging Issues in Trade Theory and Policy

Author

Listed:
  • Viet Do
  • Ngo Van Long

Abstract

We show that, even with flexible domestic wages, international outsourcing may worsen the welfare of the home country and reduce the profits of all firms. If wages are rigid, outsourcing is welfare-improving if and only if the sum of the “trade creation” effect and the “exploitation effect” exceeds the “trade diversion” effect. A wage subsidy may improve welfare. We also extend the model to a two-period framework. Delaying outsourcing can be gainful because the fixed cost of outsourcing may fall over time. A social planner would choose a different speed of outsourcing than that achieved under laissez-faire.

Suggested Citation

  • Viet Do & Ngo Van Long, 2008. "Chapter 18 International Outsourcing Under Monopolistic Competition: Winners and Losers," Frontiers of Economics and Globalization, in: Contemporary and Emerging Issues in Trade Theory and Policy, pages 345-366, Emerald Group Publishing Limited.
    • Handle: RePEc:eme:fegzzz:s1574-8715(08)04018-9
    DOI: 10.1016/S1574-8715(08)04018-9
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