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Trading Tasks: A Dynamic Theory of Offshoring

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  • Benz, Sebastian

Abstract

This paper is a dynamic extension of the well-known theory of trade in tasks. 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 short-run intertemporal profit effect and a long-run composition effect, both of which depend on the endogenous rate of product imitation. These effects can reverse well-known static wage effects from offshoring, such as the labor supply effect and productivity effect. The dynamic adjustment predicted by this model has important implications for empirical strategies seeking to identify a meaningful correlation of offshoring and relative wages.

Suggested Citation

  • Benz, Sebastian, 2013. "Trading Tasks: A Dynamic Theory of Offshoring," Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order 79816, Verein für Socialpolitik / German Economic Association.
  • Handle: RePEc:zbw:vfsc13:79816
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Chen, Hung-Ju, 2015. "Intellectual property rights and skills accumulation: A product-cycle model of FDI and outsourcing," Journal of Macroeconomics, Elsevier, vol. 46(C), pages 328-343.
    2. Michael Koch, 2014. "Skills, Tasks and the Scarcity of Talent in a Global Economy," Working Papers 145, Bavarian Graduate Program in Economics (BGPE).
    3. Chen, Hung-Ju, 2015. "Innovation and imitation: effects of intellectual property rights in a product-cycle model of skills accumulation," MPRA Paper 65745, University Library of Munich, Germany, revised Apr 2015.
    4. Hung-Ju Chen, 2015. "Innovation and Intellectual Property Rights in a Product-cycle Model of Skills Accumulation," Review of International Economics, Wiley Blackwell, vol. 23(2), pages 320-344, May.
    5. Hummels, David & Munch, Jakob R. & Xiang, Chong, 2016. "Offshoring and Labor Markets," IZA Discussion Papers 9741, Institute for the Study of Labor (IZA).
    6. Röpke, Luise, 2013. "The development of renewable energies and supply security: A trade-off analysis," Energy Policy, Elsevier, vol. 61(C), pages 1011-1021.
    7. Koch, Michael, 2014. "Skills, Tasks and the Scarcity of Talent in a Global Economy," Annual Conference 2014 (Hamburg): Evidence-based Economic Policy 100337, Verein für Socialpolitik / German Economic Association.

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    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F16 - International Economics - - Trade - - - Trade and Labor Market Interactions
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials

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