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Globalization, Product Differentiation and Wage Inequality

  • Paulo Bastos

    ()

  • Odd Rune Straume

This paper develops a two-country, general equilibrium model of oligopoly in which the degree of horizontal product differentiation is endogenously determined by rms’ strategic investments in product innovation. Consumers seek variety and product innovation is more skill intensive than production. Stronger import competition increases innovation incentives, and thereby the relative demand for skill. An intraindustry trade expansion following trade liberalization can therefore increase wage inequality between skilled and unskilled workers. In addition, since product differentiation is resource consuming, freer trade entails a potential trade-off between production and variety. The import competition effect highlighted by the model, which plays a key role in determining the general equilibrium, is consistent with panel data on Chilean manufacturing plants.

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Paper provided by Inter-American Development Bank, Research Department in its series Research Department Publications with number 4679.

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Date of creation: Aug 2010
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Handle: RePEc:idb:wpaper:4679
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