DP5082 Outsourcing and Technological Change

Author(s): Ann P Bartel , Saul Lach , Nachum Sicherman

Publication Date: May 2005

Keyword(s): technological change , Outsourcing

JEL(s): M55 , O33

Programme Areas: Industrial Organization

Link to this Page: www.cepr.org/pubs/dps/DP5082.asp

In this paper we argue that an important source of the recent increase in outsourcing is the computer and information technology revolution, characterized by increased rates of technological change. Our model shows that an increase in the pace of technological change increases outsourcing because it allows firms to use services based on leading edge technologies without incurring the sunk costs of adopting these new technologies. In addition, firms using more IT-intensive technologies face lower outsourcing costs of IT-based services generating a positive correlation between the IT level of the user and its outsourcing share of IT-based services. This implication is verified in the data.