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Impullitti, Giammario (2016)
Publisher: Wiley
Languages: English
Types: Article
In the 1970s and 1980s the US position as the global technological leader was increasingly challenged by Japan and Europe. In those years the US skill premium and residual wage inequality increased substantially. This paper presents a two-region quality ladders model of technical change where firms from the leading region innovate in all sectors of the economy, while the lagging region progressively catches up as its firms enter global innovation races in a larger number of sectors. As the innovation gap closes, the advanced country experiences fiercer foreign technological competition which forces its firms to innovate more. Faster technical change then increases the skill premium and residual inequality. Offshoring production and innovation plays a key role in shaping the link between international competition and inequality. The quantitative analysis exploits the variation in the geographical distribution of R&D investment in OECD STAN data to construct a measure of international technological competition between the US and the rest of the world. In a calibrated version of the model, the observed increase in foreign competition experienced by US firms accounts for up to 1/6th of the surge in the US skill premium and up to one half of the increase in residual inequality between 1979 and 1995.
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    • 29. Dinopoulos and Segerstrom (2010) introduce costly offshoring in a North-South qualityladder model in which only the North innovates while the South imitates. A first attempt at introducing costly multinational activity in multi-county quality-ladder growth models where firms from both countries innovate can be found in Borota et al. (2015).
    • 30. This distribution is often used in quantitative models with heterogeneous agents, to match wage, income and earning dispersion. See e.g. Chatterjee et al. (2007) and Antunes et al. (2008).
    • 31. I take the upper value of the range because the numerical solution is more robust with high λs.
    • 32. I consider that agents choose whether to go to college at age 18, so that the 18 years old cohort in 1979 is represented by people born in 1961, and life expectancy at birth in 1961 in the USA is 70 years. I also include retirment years into working life assuming that pensions are proportional (equal for simplicity) to wages during working life.
    • 33. In the present framework with quality-improving goods, growth is interpreted as the increase over time of the consumer's utility level, which is pinned down by the growth rate of quality. It is easy to show that the growth rate is
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