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Globalization, Product Differentiation and Wage InequalityPaulo BastosWorld Bank - Research Department Odd Rune StraumeUniversity of Minho - Economic Policies Research Unit (NIPE); CESifo (Center for Economic Studies and Ifo Institute for Economic Research) March 12, 2010 Univ. of Nottingham Research Paper No. 2010/03 Abstract: This paper develops a two-country, general equilibrium model of oligopoly in which the degree of horizontal product differentiation is endogenously determined by firms' strategic investments in product innovation. Consumers seek variety and product innovation is more skill intensive than production. Greater 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 supported by panel data on Chilean manufacturing plants.
Number of Pages in PDF File: 38 Keywords: Trade liberalization, Product differentiation, Innovation, Wage Inequality, General Oligopolistic Equilibrium JEL Classification: F15, F16, L13, O31 working papers seriesDate posted: March 14, 2010Suggested CitationContact Information
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