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Outsourcing and Volatility

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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Paper provided by University of California, Davis, Department of Economics in its series Working Papers with number 628.

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Length: 30
Date of creation: 13 Aug 2006
Date of revision:
Handle: RePEc:cda:wpaper:06-28
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  1. Juan Botero & Simeon Djankov & Rafael LaPorta & Florencio López-de-Silanes & Andrei Shleifer, . "The Regulation of Labor," Working Paper 19483, Harvard University OpenScholar.
  2. Linda Tesar & Ariel Burstein & Chris Kurz, 2005. "Trade, Production Sharing and the International Transmission of Business Cycles," 2005 Meeting Papers 304, Society for Economic Dynamics.
  3. Bergin, Paul R. & Feenstra, Robert C., 2000. "Staggered price setting, translog preferences, and endogenous persistence," Journal of Monetary Economics, Elsevier, vol. 45(3), pages 657-680, June.
  4. M. Ayhan Kose & Kei-Mu Yi, 2001. "International Trade and Business Cycles: Is Vertical Specialization the Missing Link?," American Economic Review, American Economic Association, vol. 91(2), pages 371-375, May.
  5. Feenstra, Robert C., 2003. "A homothetic utility function for monopolistic competition models, without constant price elasticity," Economics Letters, Elsevier, vol. 78(1), pages 79-86, January.
  6. Marc J. Melitz & Gianmarco I. P. Ottaviano, 2008. "Market Size, Trade, and Productivity," Review of Economic Studies, Oxford University Press, vol. 75(1), pages 295-316.
  7. Gene M. Grossman & Elhanan Helpman, 2002. "Integration versus Outsourcing in Industry Equilibrium," The Quarterly Journal of Economics, Oxford University Press, vol. 117(1), pages 85-120.
  8. Robert C. Feenstra & Gene M. Grossman & Douglas A. Irwin (ed.), 1996. "The Political Economy of Trade Policy: Papers in Honor of Jagdish Bhagwati," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262061864, December.
  9. John Romalis, 2004. "Factor Proportions and the Structure of Commodity Trade," American Economic Review, American Economic Association, vol. 94(1), pages 67-97, March.
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