Trade in Tasks and the Organization of Firms

We incorporate trade in tasks à la Grossman and Rossi-Hansberg
(2008) into a small open economy version of the theory of firm
organization of Marin and Verdier (2012) to examine how offshoring
affects the way firms organize. We show that the offshoring of
production tasks leads firms to reorganize with a more
decentralized management, improving the competitiveness of the
offshoring firms. We show further that the offshoring of managerial
tasks relaxes the constraint on managers but toughens competition,
and thus has an ambiguous impact on the level of decentralized
management and CEO wages of the offshoring firms. In sufficiently
open economies, however, managerial offshoring unambiguously leads
to more decentralized management and to larger CEO wages. We test
the predictions of the model based on original firm level data we
designed and collected of 660 Austrian and German multinational
firms with 2200 subsidiaries in Eastern Europe. We find that
offshoring firms are 33.4% more decentralized than non-offshoring
firms. We find further that the average fraction of managers
offshored reduces the level of decentralized management by 3.1%,
but increases the level of decentralized management by 4% in
industries with a level of openness above the 25th percentile of
the openness distribution. Lastly, we find that one additional
offshored manager lowers CEO wages relative to workers by 4.9%.