Working Paper: CEPR ID: DP3165
Authors: Gene Grossman; Elhanan Helpman
Abstract: We study the determinants of the location of sub-contracted activity in a general equilibrium model of outsourcing and trade. We model outsourcing as an activity that requires search for a partner and relationship-specific investments that are governed by incomplete contracts. The extent of international outsourcing depends inter alia on the thickness of the domestic and foreign market for input suppliers, the relative cost of searching in each market, the relative cost of customizing inputs, and the nature of the contracting environment in each country.
Keywords: imperfect contracting; intraindustry trade; outsourcing; trade in intermediate goods
JEL Codes: D23; F12; L14; L22
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| thickness of domestic and foreign markets for input suppliers (F23) | likelihood of firms finding suitable partners for outsourcing (L24) |
| technology for search (O33) | costs and success rates of finding suitable partners (C78) |
| better communication and transportation infrastructure (R42) | search costs (D23) |
| technology for specializing components (L63) | suppliers' willingness to invest in customization (L15) |
| differences in contracting environments (L14) | firms' abilities to induce necessary investments from partners (L14) |
| more verifiable relationships (L14) | better outsourcing outcomes (L24) |