Productivity Gains From Labor Outsourcing: The Role of Trade Secrets

Görkem Bostancı, Economics, University of Pennsylvania

Abstract: Labor outsourcing provides flexibility to producers but also exposes sensitive information to outsiders, which may deter outsourcing if the legal system does not provide adequate protection. I quantify the impact of trade secret protection on labor outsourcing, and consequently, on aggregate productivity. First, using event studies and difference-in-differences based estimators around the staggered adoption of the Uniform Trade Secrets Act, I show that better trade secret protection leads to increased outsourcing. Second, to quantify the resulting gains in productivity, I build a model of outsourcing and multi-industry dynamics and calibrate it with state-industry level data from the U.S. manufacturing sector. I decompose the cross-state differences in the extent of labor outsourcing into differences in firing cost, industry composition, demand volatility, and trade secret protection. I find that strengthening trade secret protection for all states to match= the state with the strictest protection would increase the outsourced employment by 33% and aggregate output by 0.8%.

Read the working paper here.