Paper #1362

Title:

Offshoring and directed technical change

Authors:

Daron Acemoglu, Gino Gancia and Fabrizio Zilibotti

Date:

November 2012 (Revised: June 2014)

Abstract:

We study the short- and long-run implications of offshoring on innovation, technology adoption, wage and income inequality in a Ricardian model with directed technical change. In our model, profit maximization determines both the extent of offshoring and the direction of technological progress. A fall in the cost of offshoring induces technical change with an ambiguous factor bias. When the initial offshoring cost is high, an increase in offshoring opportunities triggers a transition with falling real wages for unskilled workers in the West, skill-biased technical change and rising skill premia worldwide. When the offshoring cost is sufficiently low, instead, further increases in offshoring opportunities induce technical change biased in favor of the unskilled workers and may lower the skill premium. Although offshoring improves the welfare of workers in the East, it may benefit or harm unskilled workers in the West depending on parameters, the level of offshoring and the equilibrium growth rate.

Keywords:

China, Directed Technical Change, Offshoring, Productivity growth, Skill Premium.

JEL codes:

F43, O31, O33.

Area of Research:

Macroeconomics and International Economics

Published in:

American Economic Journal: Macroeconomics, Forthcoming

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