A Simple Model of Offshore Outsourcing, Technology Upgrading and Welfare
AbstractWe adapt Yeaple's (2005) heterogeneous agents framework to model firms in the North as making explicit offshore outsourcing decisions to cheap-labor economies. Globalization results from a lowering of the set-up costs incurred when engaging in offshore activities. We highlight how firms' technology transformations due to globalization will induce skill upgrading in the North, increase aggregate productivity, average wages and therefore total welfare at the cost of increased wage inequalities. We analytically derive mild conditions under which all consumers--including lower-skilled workers--will nevertheless gain from the surge of offshore outsourcing. A parameterized version of the model roughly calibrated on U.S. data is then numerically explored and confirms our positive welfare predictions.
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Date of creation: 28 Mar 2014
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Offshore outsourcing ; Globalization ; Skill upgrading; Technology upgrading ; Firm heterogeneity;
This paper has been announced in the following NEP Reports:
- NEP-ALL-2014-04-11 (All new papers)
- NEP-BEC-2014-04-11 (Business Economics)
- NEP-GER-2014-04-11 (German Papers)
- NEP-INT-2014-04-11 (International Trade)
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