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Offshoring under Uncertainty

Wilhelm Kohler and Bohdan Kukharskyy

No 7173, CESifo Working Paper Series from CESifo Group Munich

Abstract: We develop a theoretical framework to explain firms’ offshoring decisions in the presence of uncertainty. This model highlights the role of labor market institutions in shaping a firm’s ability to effectively react upon future shocks, yielding a sharp prediction of the prevalence of offshoring in a given industry: The propensity of firms to source intermediate inputs from foreign rather than domestic suppliers decreases in a foreign country’s labor market rigidity, and this effect is particularly pronounced in industries with higher volatility. Combining industry-level data on the U.S. offshoring intensity with measures of labor market rigidity and industry volatility, we find empirical evidence strongly supportive of the model’s predictions.

Keywords: offshoring; uncertainty; labor market rigidity; industry volatility (search for similar items in EconPapers)
JEL-codes: F14 F16 F23 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-int
Date: 2018
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