Oligopoly and Outsourcing

26 Pages Posted: 16 Dec 2005

See all articles by Subhayu Bandyopadhyay

Subhayu Bandyopadhyay

Federal Reserve Bank of St. Louis - Research Division; IZA Institute of Labor Economics; West Virginia University

Howard J. Wall

Lindenwood University - Center for Economics and the Environment

Date Written: December 2005

Abstract

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 might be desirable and the usual profit-shifting objectives of an export subsidy are mitigated, perhaps completely, because it might lead to higher unemployment. Also, increased international competition has no affect 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. Under wage flexibility, an outsourcing tax cannot be justified and the profit-shifting motive is the same as in a model without outsourcing. Further, if export subsidies are not possible due to WTO regulations, it is optimal to subsidize rather than to tax outsourcing. Finally, the effect of increased foreign competition on welfare depends on the relative factor intensities of the two sectors.

Keywords: oligopoly, outsourcing

JEL Classification: F12, F13, F16

Suggested Citation

Bandyopadhyay, Subhayu and Wall, Howard J., Oligopoly and Outsourcing (December 2005). IZA Discussion Paper No. 1892. Available at SSRN: https://ssrn.com/abstract=870617

Subhayu Bandyopadhyay (Contact Author)

Federal Reserve Bank of St. Louis - Research Division ( email )

411 Locust St
PO Box 442
St. Louis, MO 63011
United States

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

West Virginia University ( email )

Morgantown, WV 26506-6025
United States
304-293-7879 (Phone)
304-293-7061 (Fax)

Howard J. Wall

Lindenwood University - Center for Economics and the Environment ( email )

209 S. Kingshighway
St. Charles, MO 63301
United States

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