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  • Essays on Offshoring

    and High-skilled Migration

    Dissertation

    zur Erlangung des Doktrgrades

    der Wirtschafts- und Sozialwissenschaftlichen Fakultät

    der Erberhard Karls Universität Tübingen

    vorgelegt von

    Jens Wrona

    aus Eisenach

    Tübingen

    2014

  • a

    Tag der mündlichen Prüfung: 06.05.2014

    Dekan: Professor Dr. rer. soc. Josef Schmid

    1. Gutachter: Professor Dr. rer. pol. Udo Kreickemier

    2. Gutachter: Professor Dr. rer. soc. oec. Wilhelm Kohler

  • Acknowledgements

    First and foremost, I would like to express my deep gratitude to my first supervisor Udo Krei-

    ckemeier for his invaluable guidance and constant support in writing this thesis over the past four

    years. Not only he is a great co-author and a reliable source of inspiration, his thorough advice

    and continuous encouragement were a crucial contribution to the completion of this thesis.

    I am deeply indebted to Wilhelm Kohler for his constant support and his academic advice

    since my time as a student in Tübingen. I would like to thank him in particular for his high

    personal commitment and for his willingness to become the second supervisor of my thesis.

    I am very grateful to Hartmut Egger, who not only is the co-author of one of the chapters

    contained in this thesis, but also has provided me with invaluable advice and encouragement

    on other parts of this thesis. Similarly, I would like to thank my co-author, Jan Hogrefe, for

    his empirical expertise, which was a crucial element of our successful collaboration on another

    chapter contained in this thesis.

    Special thanks go to my colleagues, Benjamin Jung, Miriam Kohl, Nina Neubecker and

    Marcel Smolka, for their support and fruitful discussions on several occasions. In addition, I

    would like to thank the current and former research assistants at the Chair of International

    Economics for their reliable support and their enthusiastic commitment.

    My research greatly benefited from various presentations and seminars. In this regard, I

    would like to thank the participants of the Annual Congress of the European Economic Associ-

    ation (Glasgow, 2010; Gothenburg, 2013), Annual Meeting of the European Trade Study Group

    (Lausanne, 2010; Copenhagen, 2011; Leuven, 2012), Jahrestagung des Verein für Socialpolitik

    (Göttingen, 2012; Düsseldorf, 2013), Migration: Global Development, New Frontiers (London,

    2013), Conference on Asian Dynamics in a Global Context (Copenhagen, 2010), Spring Meeting

    of Young Economists (Mannheim, 2012), Göttinger Workshop für Internationale Wirtschafts-

    beziehungen (Göttingen, 2010,2011, 2012, 2013), Globalisation and Economic Policy (GEP)

    Annual Postgraduate Conference (Nottingham, 2011, 2013), RIEF Doctoral Meetings in In-

    ternational Trade and International Finance (Milano, 2012), Mainz Workshop on Trade and

    Macroeconomics (Mainz, 2013), International Workshop “Economics of Global Interactions:

    i

  • New Perspectives on Trade Factor Mobility and Development” (Bari, 2012), IOS/APB Summer

    Academy on Central and Eastern Europe (Lake Starnberg, 2012), Ruhr Graduate School (RGS)

    Doctoral Conference in Economics (Dortmund, 2011; Duisburg 2012), München-Tübingen In-

    ternational Economics Workshop (München, 2012), Tübingen-Hohenheim Christmas Workshop

    (Stuttgart, 2009, 2010, 2011, 2012) and Doktorandenworkshop der Universitäten Hohenheim,

    Tübingen und des IAW Tübingen (Stuttgart, 2012) for valuable comments and suggestions.

    Last but not least, I would like to express my warm thanks to my fiancée Julia, who con-

    stantly supported me with her abundance of patience. Further thanks go to my brother Thilo,

    my parents, Steffi and Jürgen, as well as to my friends for their support and encouragement

    during the last four years.

    Tübingen, December 2013

    ii

  • Declaration of co-authorship

    I hereby declare that this thesis incorporates material that is the result of joint research, as

    follows:

    Chapter 3 is based on joint work with Hartmut Egger and Udo Kreickemeier. The concept

    for the corresponding paper Egger, Kreickemeier, and Wrona (2013a,b) was developed jointly

    by all three authors. Both the theoretical model and the quantitative exercise were jointly and

    in equal shares developed/conducted by the three authors of Egger, Kreickemeier, and Wrona

    (2013a,b). The two parts were mutually discussed and improved, however, such that they should

    be regarded as joint work. The writing of the text was shared equally.

    Chapter 4 is based on joint work with Jan Hogrefe. The concept for the corresponding

    paper Hogrefe and Wrona (2013) was developed jointly. The theoretical model was primarily

    developed by the author of this thesis, while the empirical analysis was primarily conducted by

    Jan Hogrefe. Both parts were mutually discussed and improved, however, such that they should

    be regarded as joint work. The writing of the text was shared equally.

    Sub-chapters 5.1 to 5.4 are based on joint work with Udo Kreickemeier. The concept for the

    corresponding paper Kreickemeier and Wrona (2011a,b) was developed jointly. Both the theo-

    retical model and the empirical exercise were jointly and in equal shares developed/conducted

    by the two author of Kreickemeier and Wrona (2011a,b). The paper was mutually discussed

    and improved and hence should be regarded as joint work. The writing of the text was shared

    equally.

    iii

  • Previous publication

    This thesis includes four original papers that have been previously published in form of working

    papers or where available as unpublished manuscripts. Chapter 3 builds on CESifo Working

    Paper No. 4083 (cf. Egger, Kreickemeier, and Wrona, 2013a) and on the University of Tübingen

    Working Paper in Economics and Finance No. 50 (cf. Egger, Kreickemeier, and Wrona, 2013b).

    Chapter 4 builds on the University of Tübingen Working Paper in Economics and Finance No.

    64 (cf. Hogrefe and Wrona, 2013). Sub-chapters 5.1 to 5.4 build on GEP Discussion Paper

    11/07 (cf. Kreickemeier and Wrona, 2011a) and on the University of Tübingen Working Paper

    in Economics and Finance No. 1 (cf. Kreickemeier and Wrona, 2011b). Sub-chapters 5.5 to 5.8

    build on an unpublished manuscript, which is online available (cf. Wrona, 2014)

    iv

  • Contents

    List of Figures ix

    List of Tables xi

    1 Introduction 1

    2 The offshoring literature so far 10

    2.1 The terminology of offshoring vs. outsourcing . . . . . . . . . . . . . . . . . . . . 11

    2.2 A simple framework for the analysis of offshoring . . . . . . . . . . . . . . . . . . 12

    2.3 A short review of the theoretical offshoring literature . . . . . . . . . . . . . . . . 19

    3 Offshoring with heterogeneous firms 21

    3.1 A model of offshoring and firm heterogeneity . . . . . . . . . . . . . . . . . . . . 27

    3.1.1 The final goods industry . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28

    3.1.2 The intermediate goods industry . . . . . . . . . . . . . . . . . . . . . . . 28

    3.1.3 Equilibrium factor allocation . . . . . . . . . . . . . . . . . . . . . . . . . 30

    3.1.4 Determining the share of offshoring firms . . . . . . . . . . . . . . . . . . 34

    3.2 The effects of offshoring . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36

    3.2.1 Factor allocation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37

    3.2.2 Inequality among entrepreneurs and between groups . . . . . . . . . . . . 42

    3.2.3 Welfare . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43

    3.3 Offshoring in the presence of firm-level rent-sharing . . . . . . . . . . . . . . . . . 46

    3.4 Economy-wide inequality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53

    v

  • 3.5 A quantitative exercise . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55

    3.6 Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60

    4 Offshoring and individual skill upgrading 63

    4.1 A simple model of offshoring and on-the-job training . . . . . . . . . . . . . . . . 66

    4.2 The impact of offshoring on on-the-job training . . . . . . . . . . . . . . . . . . . 71

    4.2.1 Empirical strategy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71

    4.2.2 Data and definition of variables . . . . . . . . . . . . . . . . . . . . . . . . 73

    4.2.3 Estimation results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75

    4.2.4 The timing of offshoring and on-the-job training . . . . . . . . . . . . . . 81

    4.2.5 Further robustness checks . . . . . . . . . . . . . . . . . . . . . . . . . . . 83

    4.3 Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85

    5 Two-way migration between similar countries 86

    5.1 Permanent migration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86

    5.2 A simple model of permanent migration . . . . . . . . . . . . . . . . . . . . . . . 91

    5.3 Welfare effects of permanent migration . . . . . . . . . . . . . . . . . . . . . . . . 94

    5.4 Extensions .