Aspects of International Fragmentation

Johannes Kepler University Linz Dept. of Economics Working Paper No. 0208

39 Pages Posted: 16 Feb 2003

See all articles by Wilhelm Kohler

Wilhelm Kohler

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

Multiple version iconThere are 2 versions of this paper

Date Written: August 2002

Abstract

This paper uses a specific-factors model incorporating two sectors, in order to explore the efficiency and distributional consequences of international disintegration of production. The economy faces a neighboring region where the wage rate is lower than obtaining in the domestic economy under integrated production, which gives rise to an incentive for outsourcing. Assuming that outsourcing is takes place in only one of the two sectors, we show that under perfect markets it gives rise to an "outsourcing surplus" which is analogous to the "immigration surplus". However, in contrast to the case of immigration, the gain from outsourcing is the larger, the smaller the associated redistribution to the disadvantage of labor. However, if the activity which is lost to outsourcing involves a fixed input, then outsourcing may cause a welfare loss and the domestic wage rate may fall below the foreign level. The paper identifies conditions that lead to this outcome. The case is analyzed as a two-stage game where firms decide on the outsourcing strategy in stage one, and then behave competitively in their respective labor markets in stage two.

Suggested Citation

Kohler, Wilhelm K., Aspects of International Fragmentation (August 2002). Johannes Kepler University Linz Dept. of Economics Working Paper No. 0208, Available at SSRN: https://ssrn.com/abstract=330960 or http://dx.doi.org/10.2139/ssrn.330960

Wilhelm K. Kohler (Contact Author)

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

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