Labour policy and multinational firms: the "race to the bottom" revisited

Anindya Bhattacharya and Debapriya Sen

MPRA Paper from University Library of Munich, Germany

Abstract: This paper revisits the "race to the bottom" phenomenon in a simple game theoretic framework. We consider two countries and one multinational firm, which requires two inputs that are imperfect substitutes. In the benchmark model the labour of each country specializes in a distinct input. Seeking to maximize their labour incomes, countries simultaneously announce wages following which the firm chooses its labour employment in each country. We show that "race to the bottom" (countries setting minimum possible wages) is never an equilibrium. Moreover there are equilibria with ``race to the top", that is, countries set maximum possible wages. This result is robust in an extended model where prior to competing in wages, each country can make input-specific investments to make its labour available for one or both inputs. Provided the production function of the firm is not asymmetrically intensive in either one of the two inputs, there are equilibria of the extended game with specialization (that is, countries invest in distinct inputs) as well as "race to the top".

Keywords: race to the bottom; race to the top; labour policy; multinational; CES (constant elasticity of substitution) (search for similar items in EconPapers)
JEL-codes: F63 J42 O12 (search for similar items in EconPapers)
Date: 2018-07-11
New Economics Papers: this item is included in nep-int and nep-lma
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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https://mpra.ub.uni-muenchen.de/87858/1/MPRA_paper_87858.pdf original version (application/pdf)
https://mpra.ub.uni-muenchen.de/105762/9/MPRA_paper_105762.pdf revised version (application/pdf)
https://mpra.ub.uni-muenchen.de/91010/8/MPRA_paper_91010.pdf revised version (application/pdf)

Related works:
Journal Article: Labor policy and multinational firms: The “race to the bottom” revisited (2021)
Working Paper: Labour policy and multinational firms: the "race to the bottom" revisited (2018)
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