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Policy Evaluation in the Presence of Outsourcing : Global Competitiveness versus Political Feasibility


  • Subhayu Bandyopadhyay

    (West Virginia University and IZA)

  • Howard J . Wall

    (Federal Reserve Bank of St. Louis)


With outsourcing comes a perceived tension between the competitive pressures faced by domestic firms and the effect that outsourcing has on domestic workers. To address this tension, we present a general-equilibrium model with an oligopolistic export sector and a competitive import-competing sector. When there is a minimum wage, an outsourcing tax switches jobs to unemployed natives . In this case, the policy is both politically popular and economically sound because it raises national income . This is possible because of the pre-existing distortion in the labor market caused by the minimum wage. The effect of an export subsidy is less clear . It may or may not be justified on welfare grounds . Also, increased international competition has no effect on the level of outsourcing, but the direction of its effect on unemployment and national income depends on the relative factor intensities of the two sectors. The paper is extended to consider the scenarios of wage flexibility and price competition.

Suggested Citation

  • Subhayu Bandyopadhyay & Howard J . Wall, 2006. "Policy Evaluation in the Presence of Outsourcing : Global Competitiveness versus Political Feasibility," Working Papers 06-13 Classification-, Department of Economics, West Virginia University.
  • Handle: RePEc:wvu:wpaper:06-13

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    References listed on IDEAS

    1. Brander, James A. & Spencer, Barbara J., 1988. "Unionized oligopoly and international trade policy," Journal of International Economics, Elsevier, vol. 24(3-4), pages 217-234, May.
    2. Ethier, Wilfred J, 1986. "Illegal Immigration: The Host-Country Problem," American Economic Review, American Economic Association, vol. 76(1), pages 56-71, March.
    3. Jonathan Eaton & Gene M. Grossman, 1986. "Optimal Trade and Industrial Policy Under Oligopoly," The Quarterly Journal of Economics, Oxford University Press, vol. 101(2), pages 383-406.
    4. Jagdish Bhagwati & Arvind Panagariya, 2004. "The Muddles over Outsourcing," Journal of Economic Perspectives, American Economic Association, vol. 18(4), pages 93-114, Fall.
    5. Brander, James A. & Spencer, Barbara J., 1985. "Export subsidies and international market share rivalry," Journal of International Economics, Elsevier, vol. 18(1-2), pages 83-100, February.
    6. Richard A. Brecher, 1974. "Minimum Wage Rates and the Pure Theory of International Trade," The Quarterly Journal of Economics, Oxford University Press, vol. 88(1), pages 98-116.
    7. Brecher, Richard A., 1974. "Optimal commercial policy for a minimum-wage economy," Journal of International Economics, Elsevier, vol. 4(2), pages 139-149, May.
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    Cited by:

    1. Alina Hagiu & Emilia Clipici, 2009. "The National And The European Union Business Environment In The Context Of The Knowledge-Based Economy," JOURNAL STUDIA UNIVERSITATIS BABES-BOLYAI NEGOTIA, Babes-Bolyai University, Faculty of Business.

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