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Outsourcing Business Service and the Scope of Local Markets

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  • Yukako Ono

Abstract

This paper examines outsourcing to test whether productivity-enhancing specialization is facilitated in bigger cities. First, the paper provides a theoretical model which shows that greater local demand for a given input promotes the entry of suppliers into a city; the increased number of suppliers then results in lower outsourcing prices and a higher use of outsourcing by final producers, therefore reducing the final producers' production costs. I then test the predictions of the model by examining manufacturing plants' practices of outsourcing business services, by using plant-level data from the 1992 Annual Survey of Manufactures. The empirical results show that an exogenous increase in local demand promotes the entry of service suppliers and increases a firm's probability of outsourcing for white-collar services. In particular, I found that doubling the intensity of the use of a service in a U.S. county, which can be attributed to the industrial composition of the county, results in a 7% to 25% increase in the probability of outsourcing.

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File URL: ftp://ftp2.census.gov/ces/wp/2001/CES-WP-01-15.pdf
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Bibliographic Info

Paper provided by Center for Economic Studies, U.S. Census Bureau in its series Working Papers with number 01-15.

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Date of creation: Dec 2001
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Handle: RePEc:cen:wpaper:01-15

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Keywords: CES; economic; research; micro; data; microdata; chief; economist;

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References

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  1. Glaeser, Edward Ludwig & Kallal, Hedi D. & Scheinkman, Jose A. & Shleifer, Andrei, 1992. "Growth in Cities," Scholarly Articles 3451309, Harvard University Department of Economics.
  2. Antonio Ciccone & Robert E. Hall, 1995. "Productivity and the density of economic activity," Economics Working Papers 120, Department of Economics and Business, Universitat Pompeu Fabra.
  3. Marvin Goodfriend & John McDermott, 1994. "Early development," Working Paper 94-02, Federal Reserve Bank of Richmond.
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Cited by:
  1. Yukako Ono & Victor Stango, 2005. "Outsourcing, firm size, and product complexity: evidence from credit unions," Economic Perspectives, Federal Reserve Bank of Chicago, issue Q I, pages 2-11.
  2. Michael A. Kouparitsas, 2005. "Is there evidence of the new economy in U.S. GDP data?," Economic Perspectives, Federal Reserve Bank of Chicago, issue Q I, pages 12-29.
  3. Bartel, Ann P. & Lach, Saul & Sicherman, Nachum, 2009. "Outsourcing and Technological Change," IZA Discussion Papers 4678, Institute for the Study of Labor (IZA).
  4. Francis, Bill & Hasan, Iftekhar & John, Kose & Waisman , Maya, 2012. "Urban agglomeration and CEO compensation," Research Discussion Papers 17/2012, Bank of Finland.
  5. Davis, James C. & Henderson, J. Vernon, 2008. "The agglomeration of headquarters," Regional Science and Urban Economics, Elsevier, vol. 38(5), pages 445-460, September.

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