![]() In contrast, we present a novel mechanism through which a Pareto improvement occurs in the presence of learning dynamics. We show that in a model without learning, an integrated steady-state equilibrium in which incumbent host country managers operate alongside multinationals, can never be a Pareto improvement for the host country. ![]() The former tends to raise wages while the latter tends to reduce it. We identify two forces that determine wages : the labour demand effect and the learning effect. Workers learn from their managers and knowledge diffusion takes place through worker mobility. We develop a dynamic, general equilibrium model to understand how multinationals affect host countries through knowledge diffusion.
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