Globalization, Product Differentiation and Wage Inequality

Paulo Bastos and Odd Rune Straume

No 4679, Research Department Publications from Inter-American Development Bank, Research Department

Abstract: This paper develops a two-country, general equilibrium model of oligopoly in which the degree of horizontal product differentiation is endogenously determined by rms’ strategic investments in product innovation. Consumers seek variety and product innovation is more skill intensive than production. Stronger 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 consistent with panel data on Chilean manufacturing plants.

Keywords: Trade liberalization; Product differentiation; Innovation; Wage inequality; General oligopolistic equilibrium (search for similar items in EconPapers)
JEL-codes: F15 F16 L13 O31 (search for similar items in EconPapers)
Date: 2010-08
New Economics Papers: this item is included in nep-bec, nep-ino, nep-int and nep-opm
References: View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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Related works:
Journal Article: Globalization, product differentiation, and wage inequality (2012)
Journal Article: Globalization, product differentiation, and wage inequality (2012)
Working Paper: Globalization, Product Differentiation and Wage Inequality (2010)
Working Paper: Globalization, product differentiation and wage inequality (2010)
Working Paper: Globalization, product differentiation and wage inequality (2010)
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