A Theory of Outsourcing and Wage Decline

Thomas J. Holmes and Julia Thornton Snider

American Economic Journal: Microeconomics, 2011, vol. 3, issue 2, 38-59

Abstract: This paper develops a theory of outsourcing in which the circumstances under which factors of production can grab rents play the leading role. One factor has monopoly power (call this labor) while a second factor does not (call this capital). There are two kinds of production tasks: labor-intensive and capital-intensive. We show that if frictions limiting outsourcing are not too large, in equilibrium labor-intensive tasks are separated from capital-intensive tasks into distinct firms. When a capital-intensive country is opened to free trade, outsourcing increases and labor rents decline. A decrease in outsourcing frictions lowers labor rents. (JEL J31, L22, L24)

JEL-codes: J31 L22 L24 (search for similar items in EconPapers)
Date: 2011
Note: DOI: 10.1257/mic.3.2.38
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Citations: View citations in EconPapers (9)

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