DP3165 Outsourcing in a Global Economy

Author(s): Gene M. Grossman, Elhanan Helpman
Publication Date: January 2002
Keyword(s): imperfect contracting, intra-industry trade, outsourcing, trade in intermediate goods
JEL(s): D23, F12, L14, L22
Programme Areas: International Trade and Regional Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=3165

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.