Permanent uncertainty and oligopoly: is a strong employment protection legislation detrimental to the domestic industry?

This article deals with the effects that employment protection may have on the level of domestic activity in a context of oligopolistic international competition. Firms compete in quantities and their location choices result from a trade-off between on the one hand, the informational advantage due t...

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Bibliographic Details
Published in:Revue d'économie politique 2013-05, Vol.123 (3), p.444-461
Main Author: Lecostey, Sophie
Format: Article
Language:fre
Subjects:
Competition
Employment
Industry
Legislation
Location
Oligopolies
Prices
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Summary:This article deals with the effects that employment protection may have on the level of domestic activity in a context of oligopolistic international competition. Firms compete in quantities and their location choices result from a trade-off between on the one hand, the informational advantage due to the output flexibility afforded by the location in the country with the weakest employment protection legislation (EPL), and on the other hand, the strategic advantage of the quantity commitment which credibility is ensured by the location in the country with the strictest EPL. Although the analytical framework is very favorable to the flexibility -- which is costless -, the country with the strictest EPL may nevertheless attract firms even for relatively high levels of demand uncertainty. Moreover, when a dispersion equilibrium emerges, the level of activity (and hence the level of employment) is higher -- on average -- in the country with the strictest EPL. Finally, contrary to what might be expected, if firms competed in prices instead of in quantities, they never would agglomerate in the country with the weakest EPL. Adapted from the source document.
ISSN:0373-2630