Exporting and Offshoring with Monopsonistic Competition

Abstract

We develop a model of international trade with heterogeneous firms and monopsonistically competitive labour markets. We show that due to monopsonistic competition our model makes sharply different predictions about the effects of the export of goods and the offshoring of tasks. Trade in goods is unambiguously welfare increasing since domestic resources are reallocated to large firms with high productivity, and firms with low productivities exit the market thereby reducing the monopsony distortion present in autarky. Offshoring on the other hand gives firms additional scope for exercising monopsony power by reducing their domestic size and therefore can lead to welfare losses.

Monopsonistic competition, trade, and the profit share*

“…A natural consequence of the advances in the labor and industrial organization literature is the study of the relationship between international trade and monopsony power (Morlacco, 2017; Heiland and Kohler, 2018; Macedoni and Tyazhelnikov, 2018; MacKenzie, 2021; Egger et al., 2019; Jha and Rodriguez‐Lopez, 2021). Trade models have traditionally relied on perfectly competitive labor markets, in which labor is inelastically supplied.…”

“…A second approach, featured by Egger et al. (2019) and Jha and Rodriguez‐Lopez (2021), considers the more tractable monopsonistic competition, whereby wages of the monopsonistic factor vary across firms. However, in the models of Egger et al.…”

“…However, in the models of Egger et al. (2019) and Jha and Rodriguez‐Lopez (2021), all firms have a constant monopsony power. This implies that markups and markdowns are constant across firms.…”

“…Such an assumption is made both for tractability and to account for the growing evidence that heterogeneity on 1 Both globalization and changes in technology or technology prices have been considered as causes of the decline in the labor share (Elsby et al, 2013;Karabarbounis and Neiman, 2014). 2 Berger et al (2019) and Egger et al (2019) link workers with heterogeneous preferences to a representative worker who chooses how much labor to supply to imperfectly substitutable firms. the demand side is the main source of firm size heterogeneity (Hottman et al, 2016).…”

“…Furthermore, some of these models feature Cournot competition and all firms pay the same price for the input considered (Morlacco, 2017;Macedoni and Tyazhelnikov, 2018;Brooks et al, 2021), which is at odds with the evidence of firm heterogeneity in wages and input prices. 7 A second approach, featured by Egger et al (2019) and Jha and Rodriguez-Lopez (2021), considers the more tractable monopsonistic competition, whereby wages of the monopsonistic factor vary across firms. However, in the models of Egger et al (2019) and Jha and Rodriguez-Lopez (2021), all firms have a constant monopsony power.…”