Outsourcing and trade in a spatial world

Abstract

This paper provides an analysis of outsourcing and trade in a spatial model à la Hotelling. In this setting, we discuss the trade-off between transport-cost-related disadvantages and outsourcing-induced production cost advantages of a large economy. The model gives a rich picture of possible trade and welfare effects of a movement towards free trade and points to the role of national transport costs for explaining these effects. Moreover, it gives economic insights in the countries' incentives to lower tariffs and to participate in free trade agreements with partner countries that differ in size and economic capacity.JEL Code: F12, F15, L13.

Outsourcing and Trade in a Spatial World

“…As mentioned earlier, the respective long-run effects can be found in the working paper version of our manuscript in Egger and Egger [6].…”

“…"Disutility" from a larger distance of consumers to the final goods producer is represented by quadratic transport costs. 6 The maximum acceptable price for the final good depends on the willingness to pay (A) and the location of a consumer along the line (b). It is given by A − (b − l/2) 2 , where l/2 is the position of the final goods producer.…”

“…Hence, profits of final goods suppliers are equivalent to their operating profits. 6 The assumption of quadratic transport costs is not important for the autarky situation. However, this assumption will be crucial for the existence of a Nash-equilibrium in prices under free trade.…”

“…It turns out that such a modification renders the analysis more complicated without affecting the main results qualitatively. For a detailed discussion on the issue of Nash bargaining on input prices, see the working paper version of our manuscript in Egger and Egger [6].…”

“…15 For a discussion on cases (1) and (3) we refer the interested reader to the working paper version of our manuscript in Egger and Egger [6].…”