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American Economic Journal: Macroeconomics: Vol. 5 No. 2 (April 2013)

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Input Sourcing and Multinational Production

Article Citation

Garetto, Stefania. 2013. "Input Sourcing and Multinational Production." American Economic Journal: Macroeconomics, 5(2): 118-51.

DOI: 10.1257/mac.5.2.118

Abstract

I propose a general equilibrium framework where firms decide whether to outsource or integrate input manufacturing, domestically or abroad. By outsourcing, firms may benefit from suppliers' technologies, but pay mark-up prices. By sourcing intrafirm, they save on mark-ups and pay possibly lower foreign wages. Multinational corporations arise when firms integrate production abroad. The model predicts that intrafirm imports are positively correlated with the mean and variance of the firms' productivity distribution and with the degree of input differentiation. I use the model to quantify the US welfare gains from intrafirm trade, which amount to about 0.23 percent of consumption per-capita. (JEL D21, F12, F23, F41, L11, L24)

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Authors

Garetto, Stefania (Boston U)

JEL Classifications

D21: Firm Behavior: Theory
F12: Models of Trade with Imperfect Competition and Scale Economies
F23: Multinational Firms; International Business
F41: Open Economy Macroeconomics
L11: Production, Pricing, and Market Structure; Size Distribution of Firms
L24: Contracting Out; Joint Ventures; Technology Licensing

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American Economic Journal: Macroeconomics


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