Abstract: We propose a theory of task trade between countries that have similar relative factor endowments and technological capabilities, but may differ in size. firms produce differentiated goods by performing a continuum of tasks, each of which generates local spillovers. Tasks can be performed at home or abroad, but offshoring entails costs that vary by task. In equilibrium, the tasks with the highest offshoring costs may not be traded. Among the remainder, those with the relatively higher offshoring costs are performed in the country that has the higher wage and the higher aggregate output. We discuss the relationship between equilibrium wages, equilibrium outputs, and relative country size.

Online Appendix with Proofs of Lemmas 1, 2, and 3

Abstract: We propose a theory of the global production process that focuses on tradeable tasks, and use it to study how falling costs of offshoring affect factor prices in the source country. We identify a productivity effect of task trade that benefits the factor whose tasks are more easily moved offshore. In the light of this effect, reductions in the cost of trading tasks can generate shared gains for all domestic factors, in contrast to the distributional conflict that typically results from reductions in the cost of trading goods.

Abstract: How does the formation of cross-country teams affect the organization of work and the structure of wages? To study this question, we propose a theory of the assignment of heterogeneous agents into hierarchical teams, where less skilled agents specialize in production and more skilled agents specialize in problem solving. We first analyze the properties of the competitive equilibrium of the model in a closed economy, and show that the model has a unique and efficient solution. We then study the equilibrium of a two-country model (North and South), where countries differ in their distributions of ability, and in which agents in different countries can join together in teams. We refer to this type of integration as globalization. Globalization leads to better matches for all southern workers but only for the best northern workers. As a result, we show that globalization increases wage inequality among nonmanagers in the South, but not necessarily in the North. We also study how globalization affects the size distribution of firms and the patterns of consumption and trade in the global economy.