Agglomeration, Opportunism, and the Organization of Production
نویسنده
چکیده
Recent economic analysis of outsourcing has focused on its international dimension. In contrast, this paper considers local outsourcing. The paper specifies and solves a model where the organization of production (vertically integrated or not) and the location of production (agglomerated or not) are jointly determined. The paper shows that agglomeration reduces opportunism, a thick market effect, and so serves as a substitute for integration. The paper also shows that the normative properties of equilibrium with local outsourcing are not as clear cut as for international outsourcing, since local agglomeration is achieved at the cost of congestion. In some situations, local markets may be too thick, which would not be the case for an increase in the thickness of a world market. Finally the many changes in economic and social circumstance that have been labeled "globalization" not only impact vertical integration. They also impact agglomeration to the extent that it is a substitute. The choice is not between vertical integration and outsourcing. It is instead the richer choice between vertical integration, international outsourcing, and local outsourcing. The most important implication of this is that international outsourcing can have a profound impact on cities, with international disintegration substituting for local disintegration and reducing the benefits of agglomeration.
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