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Strategic Investment And International Outsourcing In Unionised Oligopoly

  • Dermot Leahy
  • Catia Montagna

We critically consider the conventional belief that the attractiveness of international outsourcing lies in cheaper labour costs overseas and that it offers a means to ‘escape’ the power of unions. We develop an oligopoly model in which firms facing unionised domestic labour market choose between producing an intermediate in-house or outsourcing it to a non-unionised foreign supplier that makes a relationship specific investment in developing the intermediate. We show that outsourcing typically results in higher wages and does not always reduce marginal costs. Trade liberalisation favours outsourcing particularly for the relatively less efficient firms.

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File URL: http://www.dundee.ac.uk/media/dundeewebsite/economicstudies/documents/discussion/DDPE_231.pdf
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Paper provided by Economic Studies, University of Dundee in its series Dundee Discussion Papers in Economics with number 231.

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Length: 27 pages
Date of creation: Mar 2010
Date of revision:
Handle: RePEc:dun:dpaper:231
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