Trade Induced Technical Bias and Wage Inequalities: A Theory of Defensive Innovation
This paper considers a dynamic North South model of international trade and innovations in which firms can endogenously bias the direction of technological change. We show that, when there is a differential degree of protection of property rights between the two regions, innovating firms face a trade-off between delocalization in the South and more secure property rights in the North. For a certain range of products, the optimal response to this tradeoff is the emergence of endogenous technological bias towards skilled labour technologies. We discuss the implications of this trade induced technological bias on the dynamics of international trade and relative wages in the two regions. For some configurations of parameters, the model is able to generate, along the transition path, an increase in wage inequalities in both regions and skill upgrading of southern production compatible with small changes in import penetration rates in North.
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