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Incomplete Contracts, Risk, and Ownership

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  • Hanson, Gordon H

Abstract

This paper develops a model of ownership based on incomplete contracts, specific investments, and risk and tests the model using data on industrial subcontracting in Mexico. The choice of ownership structure involves a trade-off between minimizing holdup risk and spreading natural risk. Concentrating ownership under one party reduces her exposure to holdup but increases her exposure to environmental uncertainty. Using data on Mexican apparel subcontracting, the author finds evidence that supports the model: the share of production subcontracted is high in market segments where demand is highly variable and low in market segments where manufacturers make large relationship-specific investments. Copyright 1995 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

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Bibliographic Info

Article provided by Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association in its journal International Economic Review.

Volume (Year): 36 (1995)
Issue (Month): 2 (May)
Pages: 341-63

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Handle: RePEc:ier:iecrev:v:36:y:1995:i:2:p:341-63

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Cited by:
  1. Antinori, Camille M. & Rausser, Gordon C, 2000. "Vertical integration in Mexican community forestry," CUDARE Working Paper Series 915, University of California at Berkeley, Department of Agricultural and Resource Economics and Policy.
  2. Kerschbamer, Rudolf & Maderner, Nina & Tournas, Yanni, 2000. "Idiosyncratic Investments, Outside Opportunities and the Boundaries of the Firm," CEPR Discussion Papers 2558, C.E.P.R. Discussion Papers.
  3. Andrabi, Tahir & Ghatak, Maitreesh & Khwaja, Asim Ijaz, 2006. "Subcontractors for tractors: Theory and evidence on flexible specialization, supplier selection, and contracting," Journal of Development Economics, Elsevier, vol. 79(2), pages 273-302, April.
  4. Lynne G. Zucker & Michael R. Darby, 1996. "Costly Information in Firm Transformation, Exit, or Persistent Failure," NBER Working Papers 5577, National Bureau of Economic Research, Inc.
  5. Valeria Gattai, 2005. "From the Theory of the Firm to FDI and Internalisation: A Survey," Working Papers 2005.51, Fondazione Eni Enrico Mattei.
  6. McLaren, J., 1996. "'Globalization' and Vertical Structure," Discussion Papers 1996_21, Columbia University, Department of Economics.
  7. Chu-Chia S. Lin & Ivan Png, 2002. "Monitoring Costs and the Mode of International Investment," International Trade 0210004, EconWPA.
  8. repec:ebl:ecbull:v:3:y:2002:i:2:p:1-7 is not listed on IDEAS
  9. Woodruff, Christopher, 2002. "Non-contractible investments and vertical integration in the Mexican footwear industry," International Journal of Industrial Organization, Elsevier, vol. 20(8), pages 1197-1224, October.
  10. ConcepciĆ³n PeƱarrubia & Gonzalo Olcina, 2002. "Specific investments and coordination failures," Economics Bulletin, AccessEcon, vol. 3(2), pages 1-7.

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