Trading Tasks: A Simple Theory of Offshoring

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Introduction The Model ConclusionFirm's ProblemConsider production in sector j 2 fX, Y gAssume rms, or industry, produces using a Constant Returns to ScaletechnologyFirms maximize protswherec j = wa Lj (1Firm will offshore tasks [0, I j ] wheremaxY j ,I jfp j Y j c j Y j gZI j ) + w Ija Lj βt(i)di + sa Hj + ...0w = βt(I j )w ,and if the rm produces a positive amountp j = c jGrossman and Rossi-Hansberg (Princeton University) A Simple Theory of Offshoring March, 2010 6 / 17
Introduction The Model ConclusionMarginal CostsCost of producing good j using home technology are given byZ Ic j = wa Lj (1 I) + w a Lj βt(i)di + sa HjR I0= wa Lj (1 I) + wa t(i)diLjt(I)= wa Lj Ω(I) + sa Hj0+ sa HjwhereΩ(I) = 1 I +R I0 t(i)dit(I)with Ω 0 (I) 0So possibility of offshoring affects costs exactly as labor-augmentingtechnological changeGrossman and Rossi-Hansberg (Princeton University) A Simple Theory of Offshoring March, 2010 7 / 17
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Trading Tasks: A Simple Theory of Offshoring

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