Outsourcing and Volatility

47 Pages Posted: 27 Jun 2007 Last revised: 9 Jul 2007

See all articles by Paul R. Bergin

Paul R. Bergin

University of California, Davis - Department of Economics; National Bureau of Economic Research (NBER)

Robert C. Feenstra

University of California, Davis - Department of Economics; National Bureau of Economic Research (NBER)

Gordon H. Hanson

University of California, San Diego (UCSD) - Graduate School of International Relations and Pacific Studies (IRPS); National Bureau of Economic Research (NBER)

Date Written: June 2007

Abstract

While outsourcing of production from the U.S. to Mexico has been hailed in Mexico as a valuable engine of growth, recently there have been misgivings regarding its fickleness and volatility. This paper is among the first in the trade literature to study the second moment properties of outsourcing. We begin by documenting a new stylized fact: the maquiladora outsourcing industries in Mexico experience fluctuations in value added that are roughly twice as volatile as the corresponding industries in the U.S. A difference-in-difference method is extended to second moments to verify the statistical significance of this finding. We then develop a stochastic model of outsourcing with heterogeneous firms that can explain this volatility. The model employs two novel mechanisms: an extensive margin in outsourcing which responds endogenously to transmit shocks internationally, and translog preferences which modulate firm entry.

Suggested Citation

Bergin, Paul R. and Feenstra, Robert C. and Hanson, Gordon H., Outsourcing and Volatility (June 2007). NBER Working Paper No. w13144. Available at SSRN: https://ssrn.com/abstract=992147

Paul R. Bergin

University of California, Davis - Department of Economics ( email )

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Robert C. Feenstra

University of California, Davis - Department of Economics ( email )

One Shields Drive
Davis, CA 95616-8578
United States
916-752-9240 (Phone)
916-752-9382 (Fax)

National Bureau of Economic Research (NBER)

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United States

Gordon H. Hanson (Contact Author)

University of California, San Diego (UCSD) - Graduate School of International Relations and Pacific Studies (IRPS) ( email )

9500 Gilman Drive
La Jolla, CA 92093-0519
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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