Document Type

Article

Date

5-2007

Keywords

tbd

Disciplines

Economics

Description/Abstract

We construct a model of offshoring with externalities and firm heterogeneity. Due to the presence of externalities, temporary shocks like the Y2K problem can have permanent effects, i.e., they can permanently raise the extent of offshoring in an industry. Also, the initial advantage of a country as a potential host for outsourcing activities can create a lock in effect, whereby late movers have a comparative disadvantage. Furthermore, the existence of firm heterogeneity along with externalities can help explain the dynamic process of offshoring, where the most productive firms offshore first and the others follow later. Finally, we work out some unexpected welfare implications which show that net industry profits can be lower in an outsourcing equilibrium than in a regime of no outsourcing. Consumer welfare rises, and under fairly plausible conditions this effect can offset the negative impact on profits.

Additional Information

This manuscript is from the Social Science Research Network, for more information see http://papers.ssrn.com/sol3/papers.cfm?abstract_id=995490#270914

Source

Harvested from ssrn.com

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