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Spring 2023

Perspectives on globalization

Problem set 1

           You are allowed to discuss this problem set with other students in the class, but you must provide your own individual answer. The problem set is due on June 6th at 22:00.

           Consider the Helpman-Antr‡s 2004 model of outsorcing. This model is presented in Antr‡sí book first with complete contracts (pp. 41-47) and then with incomplete contracts (pp. 95-106). This model assumes that (i) there are two countries; (ii) contracts in North are complete while contracts in South are incomplete; (iii) production uses only labor, and (iv) the wage is higher in North than in South, i.e. wN > wS. You are asked to develop two extensions of this model.

1. In the first one, assume that capital is also required for production. To answer this question, assume that (i) the marginal cost function is for i = N; S (where recall that the sub-index s refers to industry s = 1; :::; S), and (ii) the rental rate of capital is lower in the North than in the South, i.e. rN < rS. Show how the predictions of the model change as a result of this extension.

2. In the second extension, assume that there is a third country, say East, so that i = N; S; E. Keep the assumption that all headquarters are located in North. Assume that (i) East has a higher wage than South but not as high as North, i.e. wN > wE > wS, (ii) contracts are complete in East. Describe the patterns of outsourcing in this world.