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Outsourcing and Volatility

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  • Paul R. Bergin
  • Robert C. Feenstra
  • Gordon H. Hanson

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

  • Paul R. Bergin & Robert C. Feenstra & Gordon H. Hanson, 2007. "Outsourcing and Volatility," NBER Working Papers 13144, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:13144
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    References listed on IDEAS

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    JEL classification:

    • F1 - International Economics - - Trade
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance

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