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.
Original language | English (US) |
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Pages (from-to) | 38-59 |
Number of pages | 22 |
Journal | American Economic Journal: Microeconomics |
Volume | 3 |
Issue number | 2 |
DOIs | |
State | Published - May 2011 |