Hidden Costs of Offshore Outsourcing: an Analysis of Offshoring Decisions
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Offshore outsourcing has grown as a form of industrial organisation to increase profitability of firms. However, offshoring may be less lucrative than envisaged, due to the presence of hidden costs. We study the strategic interaction amongst onshore Cournot firms in the decision to offshore when they receive signals about offshore hidden costs. The analysis helps suggest policy implications for countries which are potential offshoring locations. We find the precision of signals and the range of possible hidden costs to be crucial in determining offshoring destinations. Updating of information about hidden costs leads to different equilibria including herding in offshoring.
KeywordsOffshore outsourcing Hidden costs Bayesian nash equilibrium Herding
JEL ClassificationD23 D83 L13
The author acknowledges the help of Prof. Soumyanetra Munshi in guiding to formalise this paper.
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