Outsourcing, information leakage, and consulting firms

Abstract

I analyze the R&D investment of firms that decide between outsourcing and in‐house production when information leakage is present (contractors learn clients' technology and can diffuse it to competitors)in a general equilibrium model. Information leakage tends to concentrate the outsourcing market: despite the fact that the original market is competitive, when a market for information arises, it is monopolistic. If contractors do not have control of the information, the market splits into a set of high‐tech firms that never outsource and a set of low‐tech firms that always outsource. The equilibrium structure captures several features observable in the management consulting industry.

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