| Previous research has found that firms in large cities are more productive than those in other geographical areas. My dissertation considers outsourcing as a source of agglomeration economies and provide empirical testing.; Chapter 1 presents a theoretical model which shows that greater market potential for a service induces the entry of service suppliers and results in greater competition among suppliers. This, in turn, leads to a lower market price. In order to benefit from the lower price, a firm foregoes its in-house production in favor of outsourcing.; In Chapter 2, I test the predictions of the theoretical model by examining manufacturing plants' decisions to outsource business services, using the plant-level data from the 1992 Annual Survey of Manufactures (ASM). These data provide a unique opportunity to perform a microlevel examination of firms' decisions to outsource business services and on how these decisions are influenced by local market size. The key point in this chapter is to construct an index to measure the local market potential of a service as influenced by local industrial composition; industrial composition is important since different industries employ a given service to varying degrees. I first show that the greater local market potential of a service promotes the entry of more service suppliers into a city, thereby increasing competition among them. I then perform probit and fixed-effect logit analyses to show that the greater local market potential also increases a firm's likelihood of outsourcing the service, as should be the case if the outsourcing price falls. For white-collar services, doubling the local market potential results in a 7 to 25% increase in the probability of outsourcing, when controlling for firm characteristics (size, age, etc.).; In Chapter 3, I examine the role that central administrative offices (CAOs) play in performing administrative services for back-unit manufacturing plants. I use the establishment-level data from the 1992 Survey of Auxiliary Establishments (SAE), which provides various information about central administrative offices (CAO). Combining the SAE with the ASM, I find evidence that CAOs help plants to source services inexpensively, and that the market condition surrounding CAOs influence the efficiency of plants located elsewhere. |
