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Preference Bias and Outsourcing to Market: A Steady-State Analysis

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  • Raymond Riezman
  • Ping Wang

Abstract

We analyze a model that focuses on the export/outsource decision. Outsourcing has the advantage of providing better information about local preferences. The disadvantage is that producing in the host country also means using the inferior technology embodied in the local capital. The decision of whether to offer an outsourcing contract weighs these two effects against each other. The host country accepts the outsourcing contract if the higher price they pay for the outsourced good is worth the benefit of consuming a manufactured good closer to their ideal variety. These results suggest that as low-income countries develop they become a more attractive destination for outsourcing because their capital grows to meet production needs and the local market is more lucrative. In addition, the developing low-income country finds the outsourcing contract more attractive since their increased demand for the correct variety of the manufactured good increases. This suggests that preference-based outsourcing is more likely to occur with higher-income host countries. Copyright 2009 The Authors. Journal compilation 2009 Blackwell Publishing Ltd.

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Article provided by Wiley Blackwell in its journal Review of International Economics.

Volume (Year): 17 (2009)
Issue (Month): SI (05)
Pages: 338-356

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Handle: RePEc:bla:reviec:v:17:y:2009:i:si:p:338-356

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  1. Chen, Been-Lon & Shimomura, Koji, 1998. "Self-Fulfilling Expectations and Economic Growth: A Model of Technology Adoption and Industrialization," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(1), pages 151-70, February.
  2. Bajari, Patrick & Tadelis, Steven, 2001. "Incentives versus Transaction Costs: A Theory of Procurement Contracts," RAND Journal of Economics, The RAND Corporation, vol. 32(3), pages 387-407, Autumn.
  3. Ronald W. Jones, 2000. "Globalization and the Theory of Input Trade," MIT Press Books, The MIT Press, The MIT Press, edition 1, volume 1, number 026210086x, December.
  4. Spulber, Daniel F., 2008. "Innovation and international trade in technology," Journal of Economic Theory, Elsevier, Elsevier, vol. 138(1), pages 1-20, January.
  5. Harris, Milton & Raviv, Artur, 1979. "Optimal incentive contracts with imperfect information," Journal of Economic Theory, Elsevier, Elsevier, vol. 20(2), pages 231-259, April.
  6. Ghatak, Maitreesh & Pandey, Priyanka, 2000. "Contract choice in agriculture with joint moral hazard in effort and risk," Journal of Development Economics, Elsevier, Elsevier, vol. 63(2), pages 303-326, December.
  7. Laing, Derek & Palivos, Theodore & Wang, Ping, 1995. "Learning, Matching and Growth," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 62(1), pages 115-29, January.
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Cited by:
  1. Marjit, Sugata & Xu, Xinpeng & Yang, Lei, 2009. "Offshore Outsourcing, Contractual R&D and Intellectual Property in Developing Countries," MPRA Paper 19362, University Library of Munich, Germany.

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