Working Paper: CEPR ID: DP3871
Authors: Gerda Dewit; Dermot Leahy; Catia Montagna
Abstract: 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.
Keywords: employment protection; flexibility; foreign direct investment; location; oligopoly; uncertainty
JEL Codes: D80; F23; L13
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| employment protection laws (J63) | firms' location decisions (R30) |
| Cournot competition (C72) | domestic anchorage (J12) |
| inflexibility in labor markets (J48) | higher future outputs (E23) |
| inflexibility in labor markets (J48) | attractiveness of locations with strict labor regulations (J89) |
| Bertrand competition (L13) | unfavorable conditions for maintaining domestic production (F14) |
| increasing globalization (F69) | strategic agglomeration (R32) |
| employment protection (J68) | strategic clustering versus dispersion (F12) |