Working Paper: NBER ID: w14554
Authors: Gene M. Grossman; Esteban Rossi-Hansberg
Abstract: We propose a theory of task trade between countries that have similar relative factor endowments but may differ in size. Firms produce differentiated goods by performing a continuum of tasks, each of which generates local spillovers. Tasks can be performed at home or abroad, but offshoring entails costs that vary by task. In equilibrium, the tasks with the highest offshoring costs may not be traded. Among the remainder, those with the relatively higher offshoring costs are performed in the country that has the higher wage and higher aggregate output. We discuss the relationship between equilibrium wages, equilibrium outputs, and relative country size and examine how the pattern of specialization reflects the key parameters of the model.
Keywords: task trade; offshoring; wages; specialization
JEL Codes: F12; F23
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| tasks with the highest offshoring costs (L24) | performed in the country with higher wages and aggregate output (O57) |
| tasks with lower offshoring costs (L24) | concentrated in the country with lower wages (J39) |
| country size (R12) | equilibrium wages and outputs (D59) |
| high offshoring costs (F69) | countries of similar size may not engage in task trade (F14) |
| size difference between countries increases (O57) | range of traded tasks broadens (F16) |
| improvements in communication technology (L96) | reduce offshoring costs (F23) |
| reduce offshoring costs (F23) | increase task trade (F16) |
| increase task trade (F16) | enhance welfare (I30) |