Offshoring under Uncertainty

41 Pages Posted: 1 Oct 2018

See all articles by Wilhelm Kohler

Wilhelm Kohler

University of Tuebingen - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute)

Bohdan Kukharskyy

City University of New York (CUNY)

Date Written: August 02, 2018

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

JEL Classification: F140, F160, F230

Suggested Citation

Kohler, Wilhelm K. and Kukharskyy, Bohdan, Offshoring under Uncertainty (August 02, 2018). CESifo Working Paper Series No. 7173, Available at SSRN: https://ssrn.com/abstract=3254197 or http://dx.doi.org/10.2139/ssrn.3254197

Wilhelm K. Kohler

University of Tuebingen - Department of Economics ( email )

Mohlstrasse 36
D-72074 Tuebingen, 72074
Germany

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Bohdan Kukharskyy (Contact Author)

City University of New York (CUNY) ( email )

695 Park Avenue
New York, NY 10021
United States

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