Offshoring and Firm Overlap: Welfare Effects with Non‐Sharp Selection into Offshoring

Abstract

Using German establishment data, we provide evidence for selection of larger, more productive producers into offshoring. However, the selection is not sharp, and offshoring and nonoffshoring producers coexist over a wide range of the revenue distribution. To explain this overlap, we set up a model of offshoring, in which we decouple offshoring status from revenues through heterogeneity in two technology parameters. In an empirical analysis, we employ German establishment data to estimate key parameters of the model and show that disregarding the overlap has large quantitative effects. It lowers the estimated gains from offshoring by almost 50% and, at the same time, exaggerates the role of the extensive margin for explaining the evolution of German offshoring since the 1990s.