DP3871 Employment Protection and Globalization in Dynamic Oligopoly

Author(s): Gerda Dewit, Dermot Leahy, Catia Montagna
Publication Date: April 2003
Keyword(s): employment protection, flexibility, foreign direct investment, location, oligopoly, uncertainty
JEL(s): D80, F23, L13
Programme Areas: International Trade and Regional Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=3871

We construct a model in which oligopolistic firms decide where to locate. Firms choose to locate either in a country where employment protection implies costly output adjustments or in one without adjustment costs. Using a two-period three-stage game with uncertainty it is demonstrated that location is influenced by both flexibility and strategic concerns. We show that the strategic effects under Cournot work towards domestic anchorage in the country with adjustment costs while those under Bertrand do not. Strategic agglomeration can occur in the inflexible country under Cournot and even under Bertrand provided uncertainty and foreign direct investment costs are low.