DP3165 Outsourcing in a Global Economy

Author(s): Gene Grossman , Elhanan Helpman

Publication Date: January 2002

Keyword(s): outsourcing , imperfect contracting , trade in intermediate goods , intra-industry trade

JEL(s): D23 , F12 , L14 , L22

Programme Areas: International Trade and Regional Economics

Link to this Page: www.cepr.org/pubs/dps/DP3165.asp

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.