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Why is a Flexible World More Insecure? The Way Outsourcing Amplifies Uncertainty

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Abstract

This Paper presents a macroeconomic model where firms may endogenously outsource part of their production process. We start from the premise that adaptation to uncertainty cannot be contracted upon in the worker - employer relationship. Outsourcing decisions then balance flexibility gains against hold-up costs of opportunistic behaviour by outside contractors. In equilibrium, the degree of outsourcing is shown to depend on the degree of product market competition, contractor's bargaining power, and the volatility of demand shocks. Our main result is that an increase in the degree of outsourcing amplifies the volatility of firm sales and employment; it does not, however, amplify aggregate uncertainty. This theory is therefore a good candidate in explaining the rise in firm level uncertainty witnessed in the US over the past 30 years. It also provides valuable insights on the relation between globalization, technical change, firm level uncertainty and job instability. Finally, we bring our theory's implications to the test. Evidence from firm level data is shown to be largely consistent with the main implications of our theory.

Suggested Citation

  • Thesmar, David, 2002. "Why is a Flexible World More Insecure? The Way Outsourcing Amplifies Uncertainty," CEPR Discussion Papers 3629, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:3629
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    References listed on IDEAS

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    1. Robert C. Feenstra, 1998. "Integration of Trade and Disintegration of Production in the Global Economy," Journal of Economic Perspectives, American Economic Association, vol. 12(4), pages 31-50, Fall.
    2. Robert C. Feenstra, 1998. "Integration of Trade and Disintegration of Production in the Global Economy," Journal of Economic Perspectives, American Economic Association, vol. 12(4), pages 31-50, Fall.
    3. Dani Rodrik, 1998. "Has Globalization Gone Too Far?," Challenge, Taylor & Francis Journals, vol. 41(2), pages 81-94, March.
    4. Robert A. Jones & Joseph M. Ostroy, 1984. "Flexibility and Uncertainty," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 51(1), pages 13-32.
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    Cited by:

    1. Crifo, Patricia, 2003. "La modélisation du changement organisationnel : déterminants et conséquences sur le marché du travail," L'Actualité Economique, Société Canadienne de Science Economique, vol. 79(3), pages 349-365, Septembre.
    2. Matouschek, Niko & Ramezzana, Paolo & Robert-Nicoud, Frédéric, 2004. "Labour Market Frictions, Job Insecurity and the Flexibility of the Employment Relationship," CEPR Discussion Papers 4193, C.E.P.R. Discussion Papers.
    3. Niko Matouschek & Paolo Ramezzana, 2004. "Labor Market Frictions, Job Insecurity, and the Flexibility of the Employment Relationship," Econometric Society 2004 North American Summer Meetings 28, Econometric Society.

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    More about this item

    Keywords

    Outsourcing; Uncertainty; Flexibility; Fragmentation;
    All these keywords.

    JEL classification:

    • D20 - Microeconomics - - Production and Organizations - - - General
    • D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
    • F40 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - General
    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure

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