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Permanent uncertainty, employment protection, and firms'location

  • Sophie Lecostey

    (University of Caen Basse-Normandie - CREM UMR CNRS 6211)

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    It is often argued that firms need flexibility in order to better face demand uncertainty. As employment protection legislation (EPL) impacts the cost of volume adjustments available to firms, it constrains the volume flexibility that they can achieve. Weakening EPL might thus be thought of as a desirable policy, in particular for when firms are deciding where to locate. On the other hand, it is well known that in an oligopolistic setting, flexibility is not necessarily an advantage. The aim of this paper is to analyze the consequences that different EPL regimes may have on firms' location decisions. It shows that the country characterized by the strongest EPL can nevertheless attract firms under demand uncertainty (either in an agglomeration equilibrium, or in a dispersion equilibrium), and highlights the respective and combined roles played by trade costs and strategic interaction. Moreover, it shows that if firms compete in prices, they will never agglomerate in the country with the lowest EPL.

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    File URL: http://crem.univ-rennes1.fr/wp/2012/201240.pdf
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    Paper provided by Center for Research in Economics and Management (CREM), University of Rennes 1, University of Caen and CNRS in its series Economics Working Paper Archive (University of Rennes 1 & University of Caen) with number 201240.

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    Date of creation: Nov 2012
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    Handle: RePEc:tut:cremwp:201240
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    1. Dewit, Gerda & Dermot Leahy & Catia Montagna, 2003. "Employment protection and globalisation in dynamic oligopoly," Royal Economic Society Annual Conference 2003 57, Royal Economic Society.
    2. Haaland, Jan Ingvald Meidell & Wooton, Ian, 2001. "Multinational firms: Easy come, easy go?," Center for European, Governance and Economic Development Research Discussion Papers 11, University of Goettingen, Department of Economics.
    3. Brander, James & Krugman, Paul, 1983. "A 'reciprocal dumping' model of international trade," Journal of International Economics, Elsevier, vol. 15(3-4), pages 313-321, November.
    4. Haufler, Andreas & Wooton, Ian, 2010. "Competition for firms in an oligopolistic industry: The impact of economic integration," Munich Reprints in Economics 19925, University of Munich, Department of Economics.
    5. Gerda Dewit & Dermot Leahy & Catia Montagna, 2013. "Employment Protection, Flexibility and Firms' Strategic Location Decisions under Uncertainty," Economica, London School of Economics and Political Science, vol. 80(319), pages 441-474, 07.
    6. Giovanni Maggi, 1996. "Endogenous Leadership in a New Market," RAND Journal of Economics, The RAND Corporation, vol. 27(4), pages 641-659, Winter.
    7. Gerda Dewit & Holger Görg & Catia Montagna, 2009. "Should I stay or should I go? Foreign direct investment, employment protection and domestic anchorage," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 145(1), pages 93-110, April.
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