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Outsourcing with Heterogeneous Firms

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  • Sasan Bakhtiari

    () (School of Economics, The University of New South Wales)

Abstract

A general framework for the study of outsourcing is introduced that incorporates dynamics and heterogeneity among both upstream and downstream producers to mimic an exit approach (Hirschman, 1970) to building vertical relations. The environment is one of search friction and incomplete contracts, where final-good producers require a specialized input and, upon matching with a supplier, can only contract the quantity of input. The results imply an assorted matching between producers and suppliers, so that more productive producers pair with more productive suppliers in the long run. It is shown that most efficient producers have some propensity to outsource, but only when there is a thick enough density of highly productive suppliers. Average employment in this model might increase or decrease with outsourcing, which is an observed pattern in the data. Some other diversities in plant-level behavior are also present in the results.

Suggested Citation

  • Sasan Bakhtiari, 2011. "Outsourcing with Heterogeneous Firms," Discussion Papers 2011-03, School of Economics, The University of New South Wales.
  • Handle: RePEc:swe:wpaper:2011-03
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    File URL: http://research.economics.unsw.edu.au/RePEc/papers/2011-03.pdf
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    Keywords

    Outsourcing; Productivity; Heterogeneity; Search Friction; Incomplete Contracts; Exit Strategy;

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • L21 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Business Objectives of the Firm
    • L24 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Contracting Out; Joint Ventures

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