International Outsourcing under Monopolistic Competition: Winners and Losers

We show that, even with exible domestic wages, international outsourcing may worsen the welfare of the home country and reduce the pro\u85ts of all \u85rms. If wages are rigid, outsourcing is welfare-improving if and only if the sum of the trade creatione¤ect and the exploitation e¤ectexceeds the trade diversione¤ect. A wage sub-sidy may improve welfare. We also extend the model to a two-period framework. Delaying outsourcing can be gainful because the \u85xed cost of outsourcing may fall over time. A social planner would choose a di¤erent speed of outsourcing than that achieved under laissez-faire