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Please use this identifier to cite or link to this item:
http://hdl.handle.net/2451/26133
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| Title: | Outsourcing, Information Leakage and Consulting Firms |
| Authors: | Baccaraa, Mariagiovanna |
| Issue Date: | Jan-2004 |
| Series/Report no.: | EC-04-19 |
| Abstract: | This paper offers a general equilibrium model to analyze the problem of
investment in R&D of firms that also face the decision between
outsourcing and "in-house" production in the presence of
R&D information leakage. A contractor hired by a firm learns the
firm’s technology and can diffuse the information to other firms,
either by selling it or by “spilling” it involuntarily. I
find that information leakage concerns have the tendency to concentrate
the outsourcing market with respect to a situation in which information
leakage is not an issue. In particular, despite the fact that the
original outsourcing market is perfectly competitive, I find that when a
market for information arises in equilibrium, such a market is always
monopolistic. I show that a market for information arises when
contractors have a positive but low degree of control on the information
they hold. If contractors do not have any control on the information
they hold, the market splits into a positive measure of technologically
advanced firms that never outsource and a positive measure of low-tech
firms that always outsource. If contractors have full information
control, all firms invest in technology and outsource, and a market for
information never arises. As the contractors’ degree of control on
information increases, the equilibrium technology level decreases and
the set of firms that adopt such technology increases. The structure of
the equilibria of the model captures several features observable in the
management consulting industry. |
| URI: | http://hdl.handle.net/2451/26133 |
| Appears in Collections: | Economics Working Papers
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