Outsourcing Decision and Intra-firm Wage Bargaining

Abstract

Firm's outsourcing decision changes the match surplus to be split as well as the rule for splitting the surplus with employees. This study proposes and estimates a simple wage bargaining model that tracks down the time variation of revenue, cost, and input variables while taking the outsourcing patterns as given. The model is examined using a firm-level panel data containing administrative information on income statement and balance sheet provided by the National Tax Service of South Korea. Evidence suggests that outsourcing firms tend to have (i) higher bargaining power against employees, (ii) a larger fixed cost of bargaining failure, and (iii) match surplus more responsive to the cost of purchases. These observed patterns are strong for large-sized firms with 300 or more employees.