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Outsourcing Business Service and the Scope of Local Markets


  • Yukako Ono


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.

Suggested Citation

  • Yukako Ono, 2001. "Outsourcing Business Service and the Scope of Local Markets," Working Papers 01-15, Center for Economic Studies, U.S. Census Bureau.
  • Handle: RePEc:cen:wpaper:01-15

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    References listed on IDEAS

    1. Ciccone, Antonio & Hall, Robert E, 1996. "Productivity and the Density of Economic Activity," American Economic Review, American Economic Association, vol. 86(1), pages 54-70, March.
    2. Goodfriend, Marvin & McDermott, John, 1995. "Early Development," American Economic Review, American Economic Association, vol. 85(1), pages 116-133, March.
    3. Glaeser, Edward L & Hedi D. Kallal & Jose A. Scheinkman & Andrei Shleifer, 1992. "Growth in Cities," Journal of Political Economy, University of Chicago Press, vol. 100(6), pages 1126-1152, December.
      • Edward L. Glaeser & Hedi D. Kallal & Jose A. Scheinkman & Andrei Shleifer, 1991. "Growth in Cities," NBER Working Papers 3787, National Bureau of Economic Research, Inc.
      • Glaeser, Edward Ludwig & Kallal, Hedi D. & Scheinkman, Jose A. & Shleifer, Andrei, 1992. "Growth in Cities," Scholarly Articles 3451309, Harvard University Department of Economics.
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    Cited by:

    1. Ono, Yukako, 2003. "Outsourcing business services and the role of central administrative offices," Journal of Urban Economics, Elsevier, vol. 53(3), pages 377-395, May.
    2. Andrew Friedson & Jing Li, 2015. "The impact of agglomeration economies on hospital input prices," Health Economics Review, Springer, vol. 5(1), pages 1-15, December.
    3. Bartel, Ann P & Lach, Saul & Sicherman, Nachum, 2005. "Outsourcing and Technological Change," CEPR Discussion Papers 5082, C.E.P.R. Discussion Papers.
    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. Davis, James C. & Henderson, J. Vernon, 2008. "The agglomeration of headquarters," Regional Science and Urban Economics, Elsevier, vol. 38(5), pages 445-460, September.
    6. Francis, Bill B. & Hasan, Iftekhar & John, Kose & Waisman, Maya, 2016. "Urban Agglomeration and CEO Compensation," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 51(06), pages 1925-1953, December.
    7. 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.

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