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Trading Tasks: A Dynamic Theory of Offshoring

  • Sebastian Benz

This paper is a dynamic extension of the well-known theory of trade in tasks by Grossman & Rossi-Hansberg (2008). In my model, a firm’s offshoring decision is governed by production cost savings, but also considers potential imitation risk. I show that such a consideration reduces the level of offshoring compared to a static optimization and that adjustment of offshoring volume with respect to changes in offshoring costs or labor endowment is characterized by overshooting and subsequent movement toward a steady state. Moreover, I find that offshoring affects wages via more channels than are apparent in static models. More precisely, I identify a shortrun intertemporal profit effect and a long-run composition effect, both of which depend on the endogenous rate of product imitation. These effects can reverse wellknown static wage effects from offshoring, such as the labor supply effect and productivity effect. The dynamic adjustment predicted by this model has important implications on empirical strategies to identify a meaningful correlation of offshoring and relative wages.

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File URL: http://www.cesifo-group.de/portal/page/portal/DocBase_Content/WP/WP-Ifo_Working_Papers/wp-ifo-2012/IfoWorkingPaper-150.pdf
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Paper provided by Ifo Institute - Leibniz Institute for Economic Research at the University of Munich in its series Ifo Working Paper Series with number Ifo Working Paper No. 150.

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Date of creation: 2012
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Handle: RePEc:ces:ifowps:_150
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  1. Pol Antràs & Luis Garicano & Esteban Rossi-Hansberg, 2005. "Offshoring in a Knowledge Economy," Discussion Papers 04-020, Stanford Institute for Economic Policy Research.
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  13. Grossman, Gene M & Helpman, Elhanan, 1991. "Endogenous Product Cycles," Economic Journal, Royal Economic Society, vol. 101(408), pages 1214-29, September.
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  26. repec:spr:pharme:v:22:y:2004:i:4:p:225-244 is not listed on IDEAS
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  28. Robert C. Feenstra & Gordon H. Hanson, 1999. "The Impact of Outsourcing and High-Technology Capital on Wages: Estimates For the United States, 1979–1990," The Quarterly Journal of Economics, Oxford University Press, vol. 114(3), pages 907-940.
  29. Zhu, Susan Chun & Trefler, Daniel, 2005. "Trade and inequality in developing countries: a general equilibrium analysis," Journal of International Economics, Elsevier, vol. 65(1), pages 21-48, January.
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