Permanent uncertainty, employment protection, and firms'location

Sophie Lecostey
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Sophie Lecostey: University of Caen Basse-Normandie - CREM UMR CNRS 6211

Economics Working Paper Archive (University of Rennes & University of Caen) from Center for Research in Economics and Management (CREM), University of Rennes, University of Caen and CNRS

Abstract: It is often argued that firms need flexibility in order to better face demand uncertainty. As employment protection legislation (EPL) impacts the cost of volume adjustments available to firms, it constrains the volume flexibility that they can achieve. Weakening EPL might thus be thought of as a desirable policy, in particular for when firms are deciding where to locate. On the other hand, it is well known that in an oligopolistic setting, flexibility is not necessarily an advantage. The aim of this paper is to analyze the consequences that different EPL regimes may have on firms' location decisions. It shows that the country characterized by the strongest EPL can nevertheless attract firms under demand uncertainty (either in an agglomeration equilibrium, or in a dispersion equilibrium), and highlights the respective and combined roles played by trade costs and strategic interaction. Moreover, it shows that if firms compete in prices, they will never agglomerate in the country with the lowest EPL.

Keywords: oligopoly; strategic behavior; commitment; flexibility; employment protection; trade costs; firms'location (search for similar items in EconPapers)
JEL-codes: F12 F16 L13 (search for similar items in EconPapers)
Date: 2012-11
New Economics Papers: this item is included in nep-com
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Citations: View citations in EconPapers (1)

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