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This paper studies the role of efficiency in a firm's decision to contract out. Emphasis is on the heterogeneous nature of firms and when firms are only considering outsourcing to domestic suppliers. Firm-level data on Australian manufacturing reveal an ordering of efficiency between firms that contract out and those that do not, in which contractingout firms are on aggregate less efficient. The analysis further shows that firms experience improvement in their efficiency soon after contractingdoi:10.2139/ssrn.1984394 fatcat:2dedgemnsjeuxgcueovhige6m4