Abstract
We develop an oligopoly model in which firms facing unionised domestic labor markets choose between producing an intermediate good in-house and outsourcing it to a nonunionised foreign supplier that makes a relationship-specific investment in developing the intermediate. The paper sheds light on the issue of whether international outsourcing offers a means to ‘escape’ the power of domestic unions and on the existence of intra-industry wage dispersion. We show that outsourcing typically increases marginal costs even when it lowers union wages. Despite this, more powerful unions increase the incentive to outsource.
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