Threat Effects and Trade: Wage Discipline Through Product Market Competition
42 Pages Posted: 9 Oct 2006
Date Written: October 8, 2006
We present a formal model of the effect of heightened product market competition induced by trade liberalization on the distribution of income between profits and wages. Integration increases the employment cost of wage demands, thereby decreasing bargained wages and the share of rents accruing to workers. This effect is amplified because of the existence of strategic complementarities which bring about a race to the bottom. Trade-liberalization induced wage discipline mitigates the impact of increased competition on firm rents, and may even raise profits.
Keywords: Trade, Bargaining, Rent-Sharing, Income Distribution,Threat Effects
JEL Classification: F12,F15,F16, D31, D33, J3, J5
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