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

Bhattacharya, Anindya and Sen, Debapriya (2018): Labour policy and multinational firms: the "race to the bottom" revisited. Forthcoming in: Review of Development Economics

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".

• Item Type: MPRA Paper
• Language: English
• Keywords: race to the bottom; race to the top; labour policy; multinational; constant elasticity of substitution
• Subjects: F - International Economics > F2 - International Factor Movements and International Business > F23 - Multinational Firms ; International Business; J - Labor and Demographic Economics > J4 - Particular Labor Markets > J42 - Monopsony ; Segmented Labor Markets; O - Economic Development, Innovation, Technological Change, and Growth > O1 - Economic Development > O12 - Microeconomic Analyses of Economic Development

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