Redistribution policy and offshoring in general equilibrium

Miriam Kohl and Fabrice Naumann

VfS Annual Conference 2021 (Virtual Conference): Climate Economics from Verein für Socialpolitik / German Economic Association

Abstract: We look at the effect of domestic redistribution policy on offshoring in an asymmetric two country model of monopolistic competition, heterogeneous firms and occupational choice. The redistribution scheme is modeled by a combination of a progressive income tax and a lump-sum transfer. We find that the redistribution scheme lowers the degree of globalization measured by the share of offshoring firms in the economy. The intuition for this result is straightforward. The progressive income tax changes the factor allocation in the economy making it more attractive to become a worker. This leads to downward pressure on the domestic wage and thereby to a fall in the cost advantage of the host country. Changes in the domestic tax rate therefore affect the domestic economy not only directly but also via changes in the amount of offshoring. This has important implications both for aggregate income and for inequality.

Keywords: Offshoring; Income Inequality; Redistribution; Heterogeneous firms (search for similar items in EconPapers)
JEL-codes: D31 F12 F16 H24 (search for similar items in EconPapers)
Date: 2021
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:vfsc21:242385

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