Globalization, Product Differentiation and Wage Inequality

Univ. of Nottingham Research Paper No. 2010/03

38 Pages Posted: 14 Mar 2010

See all articles by Paulo Bastos

Paulo Bastos

Technical University of Lisbon (UTL) - Research Unit on Complexity and Economics (UECE); ISEG Lisbon School of Economics and Management,Universidade de Lisboa

Odd Rune Straume

University of Minho - Economic Policies Research Unit (NIPE); CESifo (Center for Economic Studies and Ifo Institute)

Multiple version iconThere are 2 versions of this paper

Date Written: March 12, 2010

Abstract

This paper develops a two-country, general equilibrium model of oligopoly in which the degree of horizontal product differentiation is endogenously determined by firms' strategic investments in product innovation. Consumers seek variety and product innovation is more skill intensive than production. Greater import competition increases innovation incentives, and thereby the relative demand for skill. An intraindustry trade expansion following trade liberalization can therefore increase wage inequality between skilled and unskilled workers. In addition, since product differentiation is resource consuming, freer trade entails a potential trade-off between production and variety. The import competition effect highlighted by the model, which plays a key role in determining the general equilibrium, is supported by panel data on Chilean manufacturing plants.

Keywords: Trade liberalization, Product differentiation, Innovation, Wage Inequality, General Oligopolistic Equilibrium

JEL Classification: F15, F16, L13, O31

Suggested Citation

Bastos, Paulo and Straume, Odd Rune, Globalization, Product Differentiation and Wage Inequality (March 12, 2010). Univ. of Nottingham Research Paper No. 2010/03, Available at SSRN: https://ssrn.com/abstract=1569355 or http://dx.doi.org/10.2139/ssrn.1569355

Paulo Bastos (Contact Author)

Technical University of Lisbon (UTL) - Research Unit on Complexity and Economics (UECE) ( email )

Rua Miguel Lupi, 20
Lisboa, 1200-781
Portugal

ISEG Lisbon School of Economics and Management,Universidade de Lisboa ( email )

Rua do Quelhas 6
LISBOA, 1200-781
Portugal

Odd Rune Straume

University of Minho - Economic Policies Research Unit (NIPE) ( email )

Campus de Gualtar
Braga, 4710-057
Portugal

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

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