2008, “A Simple Model of Offshore Outsourcing, Technology Upgrading and Welfare”, mimeo

We adapt Yeaple’s (2005) heterogeneous agents framework to model firms in the North as making explicit offshore outsourcing decisions to cheap-labor economies. Globalization results from a lowering of the set-up costs incurred when engaging in offshore activities. We highlight how firms ’ technology transformations due to global-ization will induce skill upgrading in the North, increase aggregate productivity, av-erage wages and therefore total welfare at the cost of increased wage inequalities. We analytically derive mild conditions under which all consumers—including lower-skilled workers—will nevertheless gain from the surge of offshore outsourcing. A parameter-ized version of the model roughly calibrated on U.S. data is then numerically explored and confirms our positive welfare predictions