We propose a theory of the global production process that focuses on tradeable tasks, and use it to study how falling costs of offshoring affect factor prices in the source country. We identify a productivity effect of task trade that benefits the factor whose tasks are more easily moved offshore. In the light of this effect, reductions in the cost of trading tasks can generate shared gains for all domestic factors, in contrast to the distributional conflict that typically results from reductions in the cost of trading goods. (JEL F11, F16)

We prove the existence of a symmetric equilibrium in a circular city in which businesses and housing can both be located anywhere in the city. In this equilibrium, firms balance the external benefits from locating near other producers against the costs of longer commutes for workers. An equilibrium city need not take the form of a central business district surrounded by a residential area. We propose a general algorithm for constructing equilibria, and use it to study the way land use is affected by changes in the model's underlying parameters.

We thank the editor P.-A. Chiappori and two anonymous referees for very helpful comments. We have also benefitted from discussions with ABSTRACTWe present a theory of the organization of work in an economy where knowledge is an essential input in production: a knowledge economy. In this economy a continuum of agents with heterogeneous skills must choose how much knowledge to acquire and may produce on their own or in organizations. Our theory generates an assignment of workers to positions, a wage structure, and a continuum of knowledge-based hierarchies. Organization allows low skill agents to ask others for directions. Thus, they acquire less knowledge than in isolation. In contrast, organization allows high skill agents to leverage their knowledge through large teams. Hence, they acquire more knowledge than on their own. As a result, organization decreases wage inequality within workers, but increases income inequality among the highest skill agents. We also show that equilibrium assignments and earnings can be interpreted as the outcome of alternative market institutions such as firms, or consulting and referral markets. We use our theory to study the impact of information and communication technology, and contrast its predictions with US evidence.Our analysis shows that the equilibrium in our model results from three alternative decentralizations, corresponding to three existing institutions: first, hierarchies structured as firms with production workers and managers, where production workers deal with routine problems and managers with the exceptions; 3 second, consulting markets, where those involved in production pay fees to more knowledgeable problem solvers for help in solving their problem; third, referral markets, where agents can sell the problems whose solution they do not know to other agents at a price that decreases in the difficulty of the problem, as revealed by the skill of the agents who tried to solve it but could not. Our analysis thus pins down the boundary of the problem-solving hierarchy, but not the boundary of the firm.We view the ability of the model to predict transactions of knowledge in hierarchies within firms, or across them, as a richness of the model, since this duality is also a feature of the real world. 4Our model sheds some light on the impact of information technology (IT) on wages and organization. The analysis distinguishes two aspects of IT: its impact on the cost of communication among agents (e.g., e-mail and mobile technologies) and its ability to improve access to stored information through improvements in data storage and searching (e.g., decreases in the cost of information processing). We show that these two different aspects of information technology affect wage inequality and organization in different ways.First, decreases in the cost of communication lead teams to rely more on problem solvers, increasing the centralization of the economy -more problems are solved at the top of the hierarchy. In other words, they decrease the knowledge-content of production wor...

How does the formation of cross-country teams affect the organization of work and the structure of wages? To study this question, we propose a theory of the assignment of heterogeneous agents into hierarchical teams, where less skilled agents specialize in production and more skilled agents specialize in problem solving. We first analyze the properties of the competitive equilibrium of the model in a closed economy, and show that the model has a unique and efficient solution. We then study the equilibrium of a two-country model (North and South), where countries differ in their distributions of ability, and in which agents in different countries can join together in teams. We refer to this type of integration as globalization. Globalization leads to better matches for all southern workers but only for the best northern workers. As a result, we show that globalization increases wage inequality among nonmanagers in the South, but not necessarily in the North. We also study how globalization affects the size distribution of firms and the patterns of consumption and trade in the global economy.

For centuries, most international trade involved an exchange of complete goods. But, with recent improvements in transportation and communications technology, it increasingly entails different countries adding value to global supply chains, or what might be called "trade in tasks." We propose a new conceptualization of the global production process that focuses on tradable tasks and use it to study how falling costs of offshoring affect factor prices in the source country. We identify a productivity effect of task trade that benefits the factor whose tasks are more easily moved offshore. In the light of this effect, reductions in the cost of trading tasks can generate shared gains for all domestic factors, in contrast to the distributional conflict that typically results from reductions in the cost of trading goods.