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Factor Price Frontiers with International Fragmentation of Multistage Production

Wilhelm Kohler ()
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Wilhelm Kohler: Department of Economics, Johannes Kepler University Linz, Austria,

No 2003-05, Economics working papers from Department of Economics, Johannes Kepler University Linz, Austria

Abstract: I develop a generalized factor price frontier which incorporates endogenous adjustment of international fragmentation in multistage production, allowing for a continuum of stages. This allows us to address fragmentation, not only as an exogenous event, but also as an integral part of endogenous adjustment to a variety of changes not directly related to fragmentation. A two-dimensional general equilibrium analysis explores how the margin of fragmentation, as well as factor prices, respond to a change in the final output price, and to an improvement in the "technology of fragmentation". A key distinction arises between the "average" and "marginal" labour intensity, respectively, of domestic production in the multistage industry. The paper identifies conditions under which outsourcing to a low-wage country is a "friend" or an "enemy" to domestic labour, as well as conditions under which the Jonesian magnification e.ects underlying the Stolper-Samuelson theorem are reinforced, or mitigated, by endogenous changes in the margin of fragmentation. Protection may result in a broader or a narrower range of stages produced domestically.

JEL-codes: D33 F11 F15 F23 (search for similar items in EconPapers)
Date: 2003-04
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