OFFSHORING IN A KNOWLEDGE ECONOMY

How does the formation of cross-country teams affect the organization of workand the structure of wages? To study this question, we propose a theory of theassignment of heterogeneous agents into hierarchical teams, where less skilledagents specialize in production and more skilled agents specialize in problemsolving. We first analyze the properties of the competitive equilibrium of themodel in a closed economy, and show that the model has a unique and efficientsolution. We then study the equilibrium of a two-country model (North andSouth), where countries differ in their distributions of ability, and in which agentsin different countries can join together in teams. We refer to this type of integrationas globalization. Globalization leads to better matches for all southern workersbut only for the best northern workers. As a result, we show that globalizationincreases wage inequality among nonmanagers in the South, but not necessarilyin the North. We also study how globalization affects the size distribution of firmsand the patterns of consumption and trade in the global economy.[...]