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A Theory of Outsourcing and Wage Decline

  • Thomas J. Holmes
  • Julia Thornton Snider
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    This paper develops a theory of outsourcing in which the circumstances under which factors of production can grab rents play the leading role. One factor has monopoly power (call this labor) while a second factor does not (call this capital). There are two kinds of production tasks: labor-intensive and capital-intensive. We show that if frictions limiting outsourcing are not too large, in equilibrium labor-intensive tasks are separated from capital-intensive tasks into distinct firms. When a capital-intensive country is opened to free trade, outsourcing increases and labor rents decline. A decrease in outsourcing frictions lowers labor rents. (JEL J31, L22, L24)

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    Article provided by American Economic Association in its journal American Economic Journal: Microeconomics.

    Volume (Year): 3 (2011)
    Issue (Month): 2 (May)
    Pages: 38-59

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    Handle: RePEc:aea:aejmic:v:3:y:2011:i:2:p:38-59
    Note: DOI: 10.1257/mic.3.2.38
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    1. Gene M. Grossman & Esteban Rossi-Hansberg, 2006. "Trading Tasks: A Simple Theory of Offshoring," NBER Working Papers 12721, National Bureau of Economic Research, Inc.
    2. Esteban Rossi-Hansberg & Pol Antras & Luis Garicano, 2005. "Offshoring in a Knowledge Economy," 2005 Meeting Papers 196, Society for Economic Dynamics.
    3. Pol Antràs & Luis Garicano & Esteban Rossi-Hansberg, 2006. "Offshoring in a Knowledge Economy," The Quarterly Journal of Economics, Oxford University Press, vol. 121(1), pages 31-77.
    4. repec:hrv:faseco:4784031 is not listed on IDEAS
    5. Grossman, G.M. & Helpman, E., 2002. "Outsourcing in a Global Economy," Papers 218, Princeton, Woodrow Wilson School - Public and International Affairs.
    6. Liao, Wen-Chi, 2010. "Outsourcing and computers: Impact on urban skill level and rent," Regional Science and Urban Economics, Elsevier, vol. 40(2-3), pages 136-154, May.
    7. repec:tpr:qjecon:v:121:y:2006:i:1:p:31-77 is not listed on IDEAS
    8. Williamson, Oliver E, 1979. "Transaction-Cost Economics: The Governance of Contractural Relations," Journal of Law and Economics, University of Chicago Press, vol. 22(2), pages 233-61, October.
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