GEP Research Paper 03/16
Factor price frontiers with international fragmentation of multistage production
Wilhelm Kohler
This paper is forthcoming in Economic Journal (new title: International Outsourcing and Factor Prices with Multistage Production)
Abstract
I develop a generalized factor price frontier which incorporates endogenous adjustment of international fragmentation in multistage production, allowing for a continuum of stages. This allows us to address fragmentation, not only as an exogenous event, but also as an integral part of endogenous adjustment to a variety of changes not directly related to fragmentation. A two-dimensional general equilibrium analysis explores how the margin of fragmentation, as well as factor prices, respond to a change in the final output price, and to an improvement in the "technology of fragmentation". A key distinction arises between the "average" and "marginal" labour intensity, respectively, of domestic production in the multistage industry. The paper identifies conditions under which outsourcing to a low-wage country is a "friend" or an "enemy" to domestic labour, as well as conditions under which the Jonesian magnification effects underlying the Stolper-Samuelson theorem are reinforced, or mitigated, by endogenous changes in the margin of fragmentation. Protection may result in a broader or a narrower range of stages produced domestically.
Issued in June 2003.
This paper is available in PDF format.