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Outsourcing and Volatility

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Author Info
Bergin, Paul (U of California, Davis)
Feenstra, Robert (U of California, Davis)
Hanson, Gordon (U of California, San Diego)

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Abstract

While outsourcing of production from the U.S. to Mexico has been hailed in Mexico as a valuable engine of growth, recently there have been misgivings regarding the fickleness and volatility of this engine. This paper is the first in the literature to focus on the second moment properties of outsourcing. We begin by documenting a new stylized fact: the maquiladora outsourcing industries in Mexico experience fluctuations in value added that are roughly twice as volatile as the corresponding industries in the U.S. A difference-in-difference method adapted to second moments is used to verify that this finding is specific to the outsourcing sector and is statistically significant. We then develop two theoretical models of outsourcing that can explain this stylized fact. Both models rely on a continuum of products and many varieties of each product. In the first model, firms can enter into outsourcing relationships via new products and new product varieties, with CES preferences. In the second model, firms enter into outsourcing only via new product varieties, and the degree of entry is modulated by a novel mechanism of endogenous markups obtained from translog preferences.

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Publisher Info
Paper provided by University of California at Davis, Department of Economics in its series Working Papers with number 06-28.

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Date of creation: 2006
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Handle: RePEc:ecl:ucdeco:06-28

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  1. Buch, Claudia M. & Lipponer, Alexander, 2007. "Volatile multinationals? Evidence from the labor demand of German firms," Discussion Paper Series 1: Economic Studies 2007,22, Deutsche Bundesbank, Research Centre. [Downloadable!]
  2. Costas Arkolakis & Ananth Ramanarayanan, 2008. "Vertical specialization and international business cycle synchronization," Globalization and Monetary Policy Institute Working Paper 21, Federal Reserve Bank of Dallas. [Downloadable!]
  3. Ariel Burstein & Christopher Kurz & Linda Tesar, 2008. "Trade, Production Sharing, and the International Transmission of Business Cycles," NBER Working Papers 13731, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  4. Andrew Swiston & Tamim Bayoumi, 2008. "Spillovers Across NAFTA," IMF Working Papers 08/3, International Monetary Fund. [Downloadable!]
  5. Frederic S. Mishkin, 2008. "Globalization, Macroeconomic Performance, and Monetary Policy," NBER Working Papers 13948, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  6. Runjuan Liu & Daniel Trefler, 2008. "Much Ado About Nothing: American Jobs and the Rise of Service Outsourcing to China and India," NBER Working Papers 14061, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  7. Adamcik, Santiago, 2008. "Efectos de la Globalizacion sobre la Inflacion y la politica Monetaria Domestica
    [Globalization Effect on both Inflation and Domestic Monetary Policy]    ," MPRA Paper 9242, University Library of Munich, Germany. [Downloadable!]
  8. Claudia M. Buch, 2008. "The Great Risk Shift? Income Volatility in an International Perspective," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
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