A theory of outsourcing and wage decline

Thomas J. Holmes, Julia Thornton Snider

Research output: Contribution to journalArticlepeer-review

4 Scopus citations


This paper develops a theory of outsourcing in which the circumstances under which factors of production can grab rents play the leading role. One factor has monopoly power (call this labor) while a second factor does not (call this capital). There are two kinds of production tasks: labor-intensive and capital-intensive. We show that if frictions limiting outsourcing are not too large, in equilibrium labor-intensive tasks are separated from capital-intensive tasks into distinct firms. When a capital-intensive country is opened to free trade, outsourcing increases and labor rents decline. A decrease in outsourcing frictions lowers labor rents.

Original languageEnglish (US)
Pages (from-to)38-59
Number of pages22
JournalAmerican Economic Journal: Microeconomics
Issue number2
StatePublished - May 2011


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