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Offshoring under Uncertainty

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  • Wilhelm Kohler
  • Bohdan Kukharskyy

Abstract

We develop a theoretical framework to explain firms’ offshoring decisions in the presence of uncertainty. This model highlights the role of labor market institutions in shaping a firm’s ability to effectively react upon future shocks, yielding a sharp prediction of the prevalence of offshoring in a given industry: The propensity of firms to source intermediate inputs from foreign rather than domestic suppliers decreases in a foreign country’s labor market rigidity, and this effect is particularly pronounced in industries with higher volatility. Combining industry-level data on the U.S. offshoring intensity with measures of labor market rigidity and industry volatility, we find empirical evidence strongly supportive of the model’s predictions.

Suggested Citation

  • Wilhelm Kohler & Bohdan Kukharskyy, 2018. "Offshoring under Uncertainty," CESifo Working Paper Series 7173, CESifo.
    • Handle: RePEc:ces:ceswps:_7173
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    More about this item

    Keywords

    offshoring; uncertainty; labor market rigidity; industry volatility;
    All these keywords.

    JEL classification:

    • F14 - International Economics - - Trade - - - Empirical Studies of Trade
    • F16 - International Economics - - Trade - - - Trade and Labor Market Interactions
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business

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