Department of Economics and Business Economics

The dynamics of outsourcing: From labor cost-saving to preference-based outsourcing

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  • Wan Jung Cheng, Academia Sinica - Institute of Economics
  • ,
  • Raymond Riezman
  • Ping Wang, Washington University St. Louis, National Bureau of Economic Research

Jones's (2000) celebrated book has inspired a generation of work devoted to understanding the causes and consequences of outsourcing. While much of this work has focused on the outsourcing versus domestic production decision of the firm, with labor cost-saving as the key driver for outsourcing, we further explore how preference-based outsourcing may arise in a dynamic world equilibrium. We address this problem in a North–South model in which the outsourcing decision depends not only on labor costs but also on information about local preferences that arise with outsourcing. As the South develops, demand for manufactured goods becomes more important, so identifying specific tastes of Southern consumers matters more. As a result, preference-based outsourcing displaces cost-saving outsourcing. Our quantitative analysis indicates that, as both agricultural and manufacturing technologies grow over time, the dynamic world equilibrium switches from the export regime to the cost-saving outsourcing regime, and eventually to the preference-based outsourcing regime.

Original languageEnglish
JournalInternational Journal of Economic Theory
Pages (from-to)57-73
Number of pages17
Publication statusPublished - Mar 2021

    Research areas

  • dynamic outsourcing, learning and taste-matching, organizational choice

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