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International Outsourcing under Monopolistic Competition: Winners and Losers

Ngo Long and Viet Do

Departmental Working Papers from McGill University, Department of Economics

Abstract: We show that, even with flexible domestic wages, international outsourcing may worsen the welfare of the home country and reduce the profits of all firms. If wages are rigid, outsourcing is welfare-improving if and only if the sum of the "trade creation" effect and the "exploitation effect" exceeds the "trade diversion" effect. A wage subsidy may improve welfare. We also extend the model to a two-period framework. Delaying outsourcing can be gainful because the fixed cost of outsourcing may fall over time. A social planner would choose a different speed of outsourcing than that achieved under laissez-faire.

JEL-codes: F12 F13 F16 (search for similar items in EconPapers)
Pages: 30 pages
Date: 2007-06
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