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The Long Italian Stagnation and the Welfare Effects of Outsourcing

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  • Jacopo Zotti

    (Fondazione Eni Enrico Mattei and University of Trieste, Department of Political and Social Sciences)

Abstract

The stagnation of the Italian economy over the last two decades is widely documented. During this period, the world economy has become highly integrated, and foreign outsourcing has become a standard practice for firms. While trade theory predicts benefits from the internationalization of production, Italy seems to have gained negligibly from it, or, rather to have lost. In a simple model, we show that this may be the case when markets are overregulated and competition policies are weak. We study a small open economy with one oligopolistic and one competitive sector, which outsources part of its production process abroad. Advances in globalization entail lower tariff rates of outsourcing. Contrary to the common wisdom, we show that national welfare is an inverted U-shaped function of tariffs. There exists a tariff threshold, below which the economy loses from globalization because the competitive sector overproduces and the oligopolistic underproduces (the oligopolistic good has a higher marginal effect on welfare). Competition policies that target the competitive sector lower the threshold and allow the economy to benefit from increased openness.

Suggested Citation

  • Jacopo Zotti, 2015. "The Long Italian Stagnation and the Welfare Effects of Outsourcing," Working Papers 2015.105, Fondazione Eni Enrico Mattei.
  • Handle: RePEc:fem:femwpa:2015.105
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    References listed on IDEAS

    as
    1. Bertrand Crettez & Marie-Cécile Fagart, 2009. "Does entry improve welfare? A general equilibrium approach to competition policy," Journal of Economics, Springer, vol. 98(2), pages 97-118, November.
    2. Rebekka Christopoulou & Philip Vermeulen, 2012. "Markups in the Euro area and the US over the period 1981–2004: a comparison of 50 sectors," Empirical Economics, Springer, vol. 42(1), pages 53-77, February.
    3. Forni, L. & Gerali, A. & Pisani, M., 2010. "Macroeconomic Effects Of Greater Competition In The Service Sector: The Case Of Italy," Macroeconomic Dynamics, Cambridge University Press, vol. 14(05), pages 677-708, November.
    4. R. G. Lipsey & Kelvin Lancaster, 1956. "The General Theory of Second Best," Review of Economic Studies, Oxford University Press, vol. 24(1), pages 11-32.
    5. Pasquale Tridico, 2012. "Italy from economic decline to the current crisis," Working Papers 0005, ASTRIL - Associazione Studi e Ricerche Interdisciplinari sul Lavoro.
    6. Cosimo Beverelli & Kornel Mahlstein, 2011. "Outsourcing and Competition Policy," Journal of Industry, Competition and Trade, Springer, vol. 11(2), pages 131-147, June.
    7. Andrea Brandolini & Piero Cipollone, 2001. "Multifactor Productivity and Labour Quality in Italy, 1981-2000," Temi di discussione (Economic working papers) 422, Bank of Italy, Economic Research and International Relations Area.
    8. Jacopo Zotti & Bernd Lucke, 2014. "Welfare-optimal trade and competition policies in small open oligopolistic economies," The Journal of International Trade & Economic Development, Taylor & Francis Journals, vol. 23(3), pages 402-423, April.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Italy’s Economic Decline; General Equilibrium; Cournot Oligopoly; Outsourcing;

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • D51 - Microeconomics - - General Equilibrium and Disequilibrium - - - Exchange and Production Economies
    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F62 - International Economics - - Economic Impacts of Globalization - - - Macroeconomic Impacts
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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