Economics: Trade in tasks
Introduction
Most recent turn in the spiral of expanding markets and deepening division of labour is trade in
tasks, facilitated by the proliferation of the internet and its rapidly growing capacity for information
transmission.
A task is an activity that needs to be accomplished within a defined period of time. The more
complex the problem, the more tasks.
Division of labour van increase the productivity. Maximise job fragmentation to minimize skill
requirements.
Tasks used to be non-core activities. Units of work, need to be identifiable.
Trade in tasks = parts of activities are now outsourced (abroad is offshoring outsourcing).
Gain of tasks = productivity and competitiveness improvement. Concern: possible adverse effect on
wages and job security.
1. A small but rapidly growing literature presents mixed results
The make-or-buy decision: the firm, the local market and the global market
Firms = production technologies where relative prices of input determine the composition of inputs
given by technological constraints.
Firms = a way or organising production which aligns the incentives of individuals with the objectives
of the firm.
The key determinant of the boundary of firms is relative transaction costs, which in turn depend on
the nature of the inputs, the institutional framework and transport and communication costs.
What each party brings to and takes away from a transaction is specified in contracts, and
transaction costs stem from negotiating, monitoring and enforcing them. Transaction costs increase
with the complexity of the contract. Above a complexity threshold, it becomes impossible to specify
everything that is required by all parties under all possible contingencies. Moreover, enforcing
contracts becomes difficult if the parties have incentives to renege once the contract is written and
some rewards obtained. By organising production within the contractual framework of a firm,
transaction costs are saved.
Costs of coordinating in-house activities may rise more than proportionally with the number of
activities performed. For some tasks the in-house provision is preferred, while for others, sourcing
from local or foreign markets is favoured.
An additional complication when a task crosses a border is that the parties to a contract are
established under different jurisdictions. When an outsourcing contract entails obligations of the
parties to invest in the relationship, contracts can be hard to enforce across jurisdictions should
disputes arise.
Benefiting from lower production costs while keeping transaction costs low: relocate tasks or
activities to subsidiaries in low-cost countries. It appears that complex activities are most likely kept
in house because the import and export costs are higher.
Economics: Trade in tasks 1
Major 5.2
Introduction
Most recent turn in the spiral of expanding markets and deepening division of labour is trade in
tasks, facilitated by the proliferation of the internet and its rapidly growing capacity for information
transmission.
A task is an activity that needs to be accomplished within a defined period of time. The more
complex the problem, the more tasks.
Division of labour van increase the productivity. Maximise job fragmentation to minimize skill
requirements.
Tasks used to be non-core activities. Units of work, need to be identifiable.
Trade in tasks = parts of activities are now outsourced (abroad is offshoring outsourcing).
Gain of tasks = productivity and competitiveness improvement. Concern: possible adverse effect on
wages and job security.
1. A small but rapidly growing literature presents mixed results
The make-or-buy decision: the firm, the local market and the global market
Firms = production technologies where relative prices of input determine the composition of inputs
given by technological constraints.
Firms = a way or organising production which aligns the incentives of individuals with the objectives
of the firm.
The key determinant of the boundary of firms is relative transaction costs, which in turn depend on
the nature of the inputs, the institutional framework and transport and communication costs.
What each party brings to and takes away from a transaction is specified in contracts, and
transaction costs stem from negotiating, monitoring and enforcing them. Transaction costs increase
with the complexity of the contract. Above a complexity threshold, it becomes impossible to specify
everything that is required by all parties under all possible contingencies. Moreover, enforcing
contracts becomes difficult if the parties have incentives to renege once the contract is written and
some rewards obtained. By organising production within the contractual framework of a firm,
transaction costs are saved.
Costs of coordinating in-house activities may rise more than proportionally with the number of
activities performed. For some tasks the in-house provision is preferred, while for others, sourcing
from local or foreign markets is favoured.
An additional complication when a task crosses a border is that the parties to a contract are
established under different jurisdictions. When an outsourcing contract entails obligations of the
parties to invest in the relationship, contracts can be hard to enforce across jurisdictions should
disputes arise.
Benefiting from lower production costs while keeping transaction costs low: relocate tasks or
activities to subsidiaries in low-cost countries. It appears that complex activities are most likely kept
in house because the import and export costs are higher.
Economics: Trade in tasks 1
Major 5.2
