Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/106524
Authors: 
Schweinberger, Albert G.
Suedekum, Jens
Year of Publication: 
2015
Series/Report no.: 
DICE Discussion Paper 170
Abstract: 
This paper offers a new mechanism to explain de-industrialisation in response to a price increase of the manufactured good. In our trade model, one sector (agriculture) is perfectly competitive while the other (manufacturing) is monopolistically competitive. Both industries use skilled and unskilled labour as inputs. Entry into manufacturing requires a fixed cost in terms of skilled labour only. A rise in the market price for the differentiated goods raises both marginal revenue and the price of skilled labour, which affects the marginal cost of production and the entry cost. When short-run profits increase so that new manufacturing firms enter, fewer skilled workers are available for production purposes. This, in turn, may then lead to a decline in total manufacturing output. Our theoretical mechanism is jointly consistent with recent empirical observations on pre-mature deindustrialization characterizing several Latin American and Asian countries, and productive diversification as observed in various developing economies.
Subjects: 
entrepreneurship
monopolistic competition
de-industrialisation
JEL: 
F12
D43
ISBN: 
978-3-86304-169-4
Document Type: 
Working Paper

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