Offshoring and Reshoring: The Roles of Incomplete Contracts and Relative Bargaining Power

Abstract

This paper demonstrates that an increase in bargaining power of Northern firms relative to that of their Southern contractors can trigger reshoring if the North- South wage differential is moderate, such that only industries with a high share of unskilled labor find outsourcing profitable. However, such an increase in Northern bargaining power can increase offshoring if the wage differential is so high that even industries with a low share of unskilled labor also offshore.