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Temporary shocks and offshoring: The role of external economies and firm heterogeneity

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Author Info
Mitra, Devashish
Ranjan, Priya

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Abstract

We construct a model of offshoring with externalities and firm heterogeneity. Due to the presence of externalities, temporary shocks like the Y2K problem can have permanent effects, i.e., they can permanently raise the extent of offshoring in an industry. Also, the initial advantage of a country as a potential host for outsourcing activities can create a lock in effect, whereby late movers have a comparative disadvantage. Furthermore, the existence of firm heterogeneity along with externalities can help explain the dynamic process of offshoring, where the most productive firms offshore first and the others follow later. Finally, we work out some unexpected welfare implications which show that net industry profits can be lower in an outsourcing equilibrium than in a regime of no outsourcing. Consumer welfare rises, and under fairly plausible conditions this effect can offset the negative impact on profits.

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Publisher Info
Article provided by Elsevier in its journal Journal of Development Economics.

Volume (Year): 87 (2008)
Issue (Month): 1 (August)
Pages: 76-84
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Handle: RePEc:eee:deveco:v:87:y:2008:i:1:p:76-84

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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  3. Devashish Mitra & Priya Ranjan, 2005. "Y2K and Offshoring: The Role of External Economies and Firm Heterogeneity," NBER Working Papers 11718, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  4. Jonathan Eaton & Samuel Kortum, 2004. "An Anatomy of International Trade: Evidence from French Firms," 2004 Meeting Papers 802, Society for Economic Dynamics. [Downloadable!]
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  5. Pol Antras & Elhanan Helpman, 2004. "Global Sourcing," Journal of Political Economy, University of Chicago Press, vol. 112(3), pages 552-580, June.
    Other versions:
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  16. Andrew B. Bernard & Jonathan Eaton & J. Bradford Jensen & Samuel Kortum, 2003. "Plants and Productivity in International Trade," American Economic Review, American Economic Association, vol. 93(4), pages 1268-1290, September. [Downloadable!]
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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Devashish Mitra & Priya Ranjan, 2007. "Offshoring and Unemployment," IZA Discussion Papers 2805, Institute for the Study of Labor (IZA). [Downloadable!]
    Other versions:
  2. Mitra, Devashish & Ranjan, Priya, 2009. "Offshoring and Unemployment: The Role of Search Frictions and Labor Mobility," IZA Discussion Papers 4136, Institute for the Study of Labor (IZA). [Downloadable!]
  3. Devashish Mitra, 2009. "Offshoring and Unemployment: The Role of Search Frictions and Labor Minority," Working Papers id:2071, esocialsciences.com. [Downloadable!]
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