Working Paper: NBER ID: w13144
Authors: Paul R. Bergin; Robert C. Feenstra; Gordon H. Hanson
Abstract: While outsourcing of production from the U.S. to Mexico has been hailed in Mexico as a valuable engine of growth, recently there have been misgivings regarding its fickleness and volatility. This paper is among the first in the trade literature to study the second moment properties of outsourcing. We begin by documenting a new stylized fact: the maquiladora outsourcing industries in Mexico experience fluctuations in value added that are roughly twice as volatile as the corresponding industries in the U.S. A difference-in-difference method is extended to second moments to verify the statistical significance of this finding. We then develop a stochastic model of outsourcing with heterogeneous firms that can explain this volatility. The model employs two novel mechanisms: an extensive margin in outsourcing which responds endogenously to transmit shocks internationally, and translog preferences which modulate firm entry.
Keywords: outsourcing; volatility; maquiladoras; economic activity
JEL Codes: F1; F4
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| outsourcing industries in Mexico (L24) | fluctuations in economic activity (E32) |
| fluctuations in economic activity (E32) | higher volatility in Mexican outsourcing (F69) |
| endogeneity of the extensive margin in outsourcing (L24) | observed volatility (G17) |
| domestic economic booms in the US (N12) | increase in outsourcing (L24) |
| increase in outsourcing (L24) | amplified volatility in the Mexican outsourcing sector (F69) |