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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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Bibliographic Info

Paper provided by Federal Reserve Bank of Chicago in its series Working Paper Series with number WP-01-09.

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Date of creation: 2001
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Handle: RePEc:fip:fedhwp:wp-01-09

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Keywords: Contracts ; Industrial productivity;

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  1. Goodfriend, Marvin & McDermott, John, 1995. "Early Development," American Economic Review, American Economic Association, vol. 85(1), pages 116-33, March.
  2. Glaeser, Edward Ludwig & Kallal, Hedi D. & Scheinkman, Jose A. & Shleifer, Andrei, 1992. "Growth in Cities," Scholarly Articles 3451309, Harvard University Department of Economics.
  3. Antonio Ciccone & Robert E. Hall, 1993. "Productivity and the Density of Economic Activity," NBER Working Papers 4313, National Bureau of Economic Research, Inc.
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Cited by:
  1. 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.
  2. J Vernon Henderson & James Davis, 2004. "The Agglomeration of Headquarters," Working Papers 04-02, Center for Economic Studies, U.S. Census Bureau.
  3. Ann Bartel & Saul Lach & Nachum Sicherman, 2005. "Outsourcing and Technological Change," NBER Working Papers 11158, National Bureau of Economic Research, Inc.
  4. 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.
  5. Francis, Bill & Hasan, Iftekhar & John, Kose & Waisman , Maya, 2012. "Urban agglomeration and CEO compensation," Research Discussion Papers 17/2012, Bank of Finland.

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