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Labour policy and multinational firms: the "race to the bottom" revisited

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  • Anindya Bhattacharya
  • Debapriya Sen

Abstract

This paper revisits the "race to the bottom" phenomenon in a simple game theoretic framework. We consider two countries and one multinational firm, which requires two inputs that are imperfect substitutes. In the benchmark model the labour of each country specializes in a distinct input. Seeking to maximize their labour incomes, countries simultaneously announce wages following which the firm chooses its labour employment in each country. We show that "race to the bottom" (countries setting minimum possible wages) is never an equilibrium. Moreover there are equilibria with "race to the top", that is, countries set maximum possible wages. This result is robust in an extended model where prior to competing in wages, each country can make input-specific investments to make its labour available for one or both inputs. Provided the production function of the firm is not asymmetrically intensive in either one of the two inputs, there are equilibria of the extended game with specialization (that is, countries invest in distinct inputs) as well as "race to the top".

Suggested Citation

  • Anindya Bhattacharya & Debapriya Sen, 2018. "Labour policy and multinational firms: the "race to the bottom" revisited," Discussion Papers 18/06, Department of Economics, University of York.
  • Handle: RePEc:yor:yorken:18/06
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    References listed on IDEAS

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    1. Davies, Ronald B. & Vadlamannati, Krishna Chaitanya, 2013. "A race to the bottom in labor standards? An empirical investigation," Journal of Development Economics, Elsevier, vol. 103(C), pages 1-14.
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    8. Potrafke, Niklas, 2013. "Globalization and labor market institutions: International empirical evidence," Journal of Comparative Economics, Elsevier, vol. 41(3), pages 829-842.
    9. Yin, Xiangkang & Ng, Yew-Kwang, 2000. "Quantity Precommitment and Bertrand Competition Yield Cournot Outcomes: A Case with Product Differentiation: Reply," Australian Economic Papers, Wiley Blackwell, vol. 39(1), pages 113-119, March.
    10. Olney, William W., 2013. "A race to the bottom? Employment protection and foreign direct investment," Journal of International Economics, Elsevier, vol. 91(2), pages 191-203.
    11. Milgrom, Paul & Roberts, John, 1990. "Rationalizability, Learning, and Equilibrium in Games with Strategic Complementarities," Econometrica, Econometric Society, vol. 58(6), pages 1255-1277, November.
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    More about this item

    Keywords

    race to the bottom; race to the top; labour policy; multinational; constant elasticity of substitution;

    JEL classification:

    • F63 - International Economics - - Economic Impacts of Globalization - - - Economic Development
    • J42 - Labor and Demographic Economics - - Particular Labor Markets - - - Monopsony; Segmented Labor Markets
    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development

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