Outsourcing with Heterogeneous Firms

26 Pages Posted: 15 Feb 2011

See all articles by Sasan Bakhtiari

Sasan Bakhtiari

Australian Department of Industry; Crawford School, ANU

Date Written: January 13, 2011

Abstract

A general framework for the study of outsourcing is introduced that incorporates dynamics and heterogeneity among both upstream and downstream producers to mimic an exit approach (Hirschman, 1970) to building vertical relations. The environment is one of search friction and incomplete contracts, where final-good producers require a specialized input and, upon matching with a supplier, can only contract the quantity of input. The results imply an assorted matching between producers and suppliers, so that more productive producers pair with more productive suppliers in the long run. It is shown that most efficient producers have some propensity to outsource, but only when there is a thick enough density of highly productive suppliers. Average employment in this model might increase or decrease with outsourcing, which is an observed pattern in the data. Some other diversities in plant-level behavior are also present in the results.

Keywords: Outsourcing, Productivity, Heterogeneity, Search Friction, Incomplete Contracts, Exit Strategy

JEL Classification: D21, D23, L21, L24

Suggested Citation

Bakhtiari, Sasan, Outsourcing with Heterogeneous Firms (January 13, 2011). UNSW Australian School of Business Research Paper No. 2011 ECON 03. Available at SSRN: https://ssrn.com/abstract=1762307

Sasan Bakhtiari (Contact Author)

Australian Department of Industry ( email )

341 George Street
Sydney, NSW 2000
Australia

HOME PAGE: http://sites.google.com/site/sasanbakhtiari

Crawford School, ANU ( email )

7 Liversidge Street
Lennox Crossing
Canberra, ACT 0200
Australia

HOME PAGE: http://sites.google.com/site/sasanbakhtiari

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