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Firm Heterogeneity, Contract Enforcement, and the Industry Dynamics of Offshoring

  • Alireza Naghavi

    ()

    (University of Bologna)

  • Gianmarco I. P. Ottaviano

    ()

    (Bocconi University)

We develop an endogenous growth model with R&D spillovers to study the long run consequences of offshoring with firm heterogeneity and incomplete contracts. In so doing, we model offshoring as the geographical fragmentation of a firm’s production chain between a home upstream division and a foreign downstream one. While there is always a positive correlation between upstream bargaining weight and offshoring activities, there is an inverted U-shaped relationship between these and growth. Whether offshoring with incomplete contracts also increases consumption depends on firm heterogeneity. As for welfare, whereas with complete contracts an R&D subsidy is enough to solve the inefficiency due to R&D spillovers, with incomplete contracts a production subsidy is also needed.

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Paper provided by Centro Studi Luca d'Agliano, University of Milano in its series Development Working Papers with number 282.

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Length: 36
Date of creation: 17 Nov 2009
Date of revision:
Handle: RePEc:csl:devewp:282
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