Adam Szeidl

Complementarities between Outsourcing and Foreign Sourcing

Outsourcing has been growing both domestically and internationally. So has foreign direct investment (FDI). New models of international trade address these phenomena using recent advances in the economic theory of organizations. The models help us to identify circumstances under which firms choose to make their inputs themselves or buy them from third parties, and when they choose to produce their inputs locally or abroad (see Grossman and Helpman, 2002, 2004, 2005; Dalia Marin and Thierry Verdier, 2002, 2003; Diego Puga and Daniel Trefler, 2002; Pol Antras, 2003; Antras and Helpman, 2004). Some authors investigate the organizational choices of homogeneous firms in an industry with some particular characteristics while others examine the relative prevalence of different organizational structures in industries with heterogeneous firms. In this paper, we combine elements from Antras and Helpman (2004) and Grossman et al. (2004a) to study the relationship between outsourcing and foreign sourcing (or “offshoring”). Our analysis focuses on industries with heterogeneous firms that make intensive use of intermediate inputs. Contracting problems limit the types of contracts that can be written between final producers and input suppliers. Intermediate inputs can be produced domestically or in a low-wage country and can be produced inhouse or outsourced. By assumption, assembly of final goods takes place within the boundaries of the firm that has developed the product, but we sometimes allow this activity to be performed abroad. First, we assume that assembly takes place at home and that intermediate goods can be transported at no cost. We identify conditions under which cross-industry variation in the fixed cost of outsourcing generates a positive correlation between outsourcing and foreign sourcing. We then introduce transport costs for intermediate inputs and allow firms to choose where to assemble their final output. In this case, crossindustry variation in the fixed cost of doing business abroad produces a second complementarity between outsourcing and foreign sourcing. The latter finding is in keeping with conditions described in a recent article in the Financial Times about problems facing firms producing in China (see Peter Marsh, 2004). Companies that cannot find efficient local sources for components in China are burdened with the extra costs of shipping inputs from home. Apparently, FDI often goes hand-in-hand with the ability to find suitable Chinese suppliers. The trade-offs between in-house production and outsourcing and between shipping intermediate goods and producing them in proximity to assembly operations are the subject of our investigation below.

Endogenous networks, social games, and evolution

Abstract This paper studies a social game where agents choose their partners as well as their actions. Players interact with direct and indirect neighbors in the endogenous network. We show that the architecture of any nontrivial Nash equilibrium is minimally connected, and equilibrium actions approximate a symmetric equilibrium of the underlying game. We apply the model to analyze stochastic stability in 2 × 2 coordination games. We find that long-run equilibrium selection depends on a trade-off between efficiency and risk dominance due to the presence of scale effects arising from network externalities. Our results suggest a general pattern of equilibrium selection.

Existence of equilibrium in large double auctions

We show the existence of a pure strategy, symmetric, increasing equilibrium in double auction markets with correlated private valuations and many participants. The equilibrium we find is arbitrarily close to fully revealing as the market size grows. Our results provide strategic foundations for price-taking behavior in large markets.

Consumption Commitments and Asset Prices

This paper studies portfolio choice and asset prices in a model with two consumption goods, one of which involves a commitment in that its consumption can only be adjusted at a cost. Commitments effectively make investors more risk averse: they invest less in risky assets and smooth total consumption more. Aggregating over a population of such consumers implies dynamics that match those of a representative consumer economy with habit formation. Calibrations show that the model can resolve the equity premium puzzle. We test the key prediction that an exogenous increase in economic commitments (e.g., housing) causes a more conservative portfolio allocation using a novel instrumental variables strategy related to age at marriage. We find that a

Core and Periphery in Endogenous Networks

1 increase in housing causes a 50-70 cent reallocation from stocks to bonds for the average investor. Exploiting differences in the variance of home prices across cities, we show that this effect is due to commitments and not greater exposure to housing price risk.

Existence of Equilibrium in Large Double Auctions

Many economic and social networks share two common organizing features: (1) a core-periphery structure; (2) positive correlation between network centrality and payoffs. In this paper, we build a model of network formation where these features emerge endogenously. In our model, the unique equilibrium network architecture is a periphery-sponsored star. In this equilibrium, one player, the center, maintains no links and achieves a high payoff, while all other players maintain a single link to the center and achieve lower payoffs. With heterogeneous groups, equilibrium networks are interconnected stars. We show that small minorities tend to integrate while large minorities are self-sufficient. Although any player can be the center in a static equilibrium, evolution selects the agent with most valuable resources as the center in the long run. In particular, even small inequalities in resources can lead to large payoff inequality because of the endogenous social structure. Our main results are robust to the introduction of transfers and bargaining over link costs.

Consumption Commitments and Habit Formation

We show the existence of a pure strategy, symmetric, increasing equilibrium in double auction markets with correlated private valuations and many participants. The equilibrium we find is arbitrarily close to fully revealing as the market size grows. Our results provide strategic foundations for price-taking behavior in large markets.

Imported Inputs and Productivity

We analyze the implications of household-level adjustment costs for the dynamics of aggregate consumption. We show that an economy in which agents have “consumption commitments” is approximately equivalent to a habit formation model in which the habit stock is a weighted average of past consumption if idiosyncratic risk is large relative to aggregate risk. Consumption commitments can thus explain the empirical regularity that consumption is excessively sensitive and excessively smooth, findings that are typically attributed to habit formation. Unlike habit formation and other theories, but consistent with empirical evidence, the consumption commitments model also predicts that excess sensitivity and smoothness vanish for large shocks. These results suggest that behavior previously attributed to habit formation may be better explained by adjustment costs. We develop additional testable predictions to further distinguish the commitment and habit models and show that the two models have different welfare implications.