Global Sourcing if Contracts are Reference Points
AbstractThis paper presents econometric evidence for a link between a country’s level of egalitarianism and its inward foreign direct investment. In order to provide a theoretical rationale for this relationship, I embed Hart and Moore’s (2008) novel contractual foundation into a simple model of global sourcing with culturally dissimilar countries. Entrepreneurs can cooperate with foreign suppliers under two contractual modes: rigid and flexible. If suppliers consider original contracts as reference points and future is uncertain, a fundamental tradeoff arises between these two modes. By stipulating a range of possible outcomes, a flexible contract allows for future adaptation but is associated with ex post haggling cost. By specifying a single outcome, a rigid contract eliminates future disagreement but precludes beneficial adjustments to the occurring shocks. The key message of this paper is twofold: Due to lower haggling cost, the degree of contractual flexibility is higher in egalitarian countries. If future is uncertain, these countries are more attractive for international investors than less egalitarian ones.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Bavarian Graduate Program in Economics (BGPE) in its series Working Papers with number 129.
Length: 41 pages
Date of creation: Nov 2012
Date of revision:
Foreign direct investment; cross-country cultural differences; egalitarianism; risk; contracts as reference points; haggling; contractual rigidity vs. flexibility;
Find related papers by JEL classification:
- D03 - Microeconomics - - General - - - Behavioral Economics; Underlying Principles
- D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
- D63 - Microeconomics - - Welfare Economics - - - Equity, Justice, Inequality, and Other Normative Criteria and Measurement
- F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
- L23 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Organization of Production
You can help add them by filling out this form.
reading list or among the top items on IDEAS.Access and download statisticsgeneral information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Kamila Cygan-Rehm).
If references are entirely missing, you can add them using this form.