Offshoring, migrants and native workers: The optimal choice under asymmetric information

This paper presents a theoretical model of the optimal choice for firms between offshoring and hiring immigrant workers, in conditions of asymmetric information about their ability and effort in production (symmetric information is assumed for home born workers). When a domestic firm hires an immigrant it has no knowledge of the worker's ability; when the firm goes abroad it uses local agents to obtain additional information about workers, allowing enforceable contracts. I show that it is optimal for firms to produce low quality products by offshoring production abroad and that high quality products will be produced using native workers, while intermediate quality level products are more likely to be produced at home using foreign born workers.