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Trade Policy and Firm Boundaries

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Author Info

  • Andrew F. Newman

    ()
    (Boston University and CEPR)

  • Laura Alfaro

    (Harvard Business School and NBER)

  • Paola Conconi

    (Universit´e Libre de Bruxelles (ECARES) and CEPR)

  • Harald Fadinger

    (University of Vienna)

Abstract

This paper provides evidence that market conditions matter for organization design by studying how trade policy affects vertical integration. We embed an incomplete-contract model of firm boundaries into an international trade framework. Integration decisions are driven by a tradeoff between managers’ pecuniary benefits of coordinating production and their private benefits of operating in preferred ways. Integration generates more output than non-integration, but imposes a cost on managers by forcing them to accommodate to common procedures. A key implication is that higher product prices result in more integration. Since trade policy affects prices, it influences organizational decisions: higher tariffs lead to more integration; moreover, ownership structures are more alike across countries with similar levels of protection. To assess the evidence, we construct firm-level indices of vertical integration for a large set of countries from a unique dataset. Our empirical analysis, which exploits both cross-section and time-series variation in import tariffs, provides strong support for the predictions of the model.

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Bibliographic Info

Paper provided by Boston University - Department of Economics in its series Boston University - Department of Economics - Working Papers Series with number WP2011-035.

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Length: 48 pages
Date of creation: Jan 2011
Date of revision:
Handle: RePEc:bos:wpaper:wp2011-035

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References

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  1. Legros, Patrick & Newman, Andrew, 2000. "Competing for Ownership," CEPR Discussion Papers 2573, C.E.P.R. Discussion Papers.
  2. Holger Breinlich, 2006. "Trade liberalization and industrial restructuring through mergers and acquisitions," LSE Research Online Documents on Economics 19868, London School of Economics and Political Science, LSE Library.
  3. Harrison, Ann E. & Love, Inessa & McMillan, Margaret S., 2004. "Global capital flows and financing constraints," Journal of Development Economics, Elsevier, vol. 75(1), pages 269-301, October.
  4. Christian Broda & Joshua Greenfield & David Weinstein, 2006. "From Groundnuts to Globalization: A Structural Estimate of Trade and Growth," NBER Working Papers 12512, National Bureau of Economic Research, Inc.
  5. Pol Antràs & Robert W. Staiger, 2012. "Offshoring and the Role of Trade Agreements," American Economic Review, American Economic Association, vol. 102(7), pages 3140-83, December.
  6. Pinelopi K. Goldberg & Nina Pavcnik, 2004. "Trade, Inequality, and Poverty: What Do We Know? Evidence from Recent Trade Liberalization Episodes in Developing Countries," NBER Working Papers 10593, National Bureau of Economic Research, Inc.
  7. Pol Antràs & Elhanan Helpman, 2003. "Global Sourcing," NBER Working Papers 10082, National Bureau of Economic Research, Inc.
  8. Christian Broda & Nuno Limao & David E. Weinstein, 2008. "Optimal Tariffs and Market Power: The Evidence," American Economic Review, American Economic Association, vol. 98(5), pages 2032-65, December.
  9. Pol Antràs, 2003. "Firms, Contracts, And Trade Structure," The Quarterly Journal of Economics, MIT Press, vol. 118(4), pages 1375-1418, November.
  10. Ornelas, Emanuel & Turner, John L., 2008. "Trade liberalization, outsourcing, and the hold-up problem," Journal of International Economics, Elsevier, vol. 74(1), pages 225-241, January.
  11. Nick Bloom & Raffaella Sadun & John Van Reenen, 2010. "Does product market competition lead firms to decentralize?," LSE Research Online Documents on Economics 28615, London School of Economics and Political Science, LSE Library.
  12. repec:eca:wpaper:2008_025 is not listed on IDEAS
  13. Patrick Legros & Andrew F. Newman, 2013. "A Price Theory of Vertical and Lateral Integration," The Quarterly Journal of Economics, Oxford University Press, vol. 128(2), pages 725-770.
  14. Nunn, Nathan, 2007. "Relationship-Specificity, Incomplete Contracts, and the Pattern of Trade," Scholarly Articles 4686801, Harvard University Department of Economics.
  15. Van den Steen, Eric, 2003. "Organizational Beliefs and Managerial Vision," Working papers 4224-01, Massachusetts Institute of Technology (MIT), Sloan School of Management.
  16. Andrew F. Newman & Patrick Legros & Paola Conconi, 2011. "Trade Liberalization and Organizational Change," Boston University - Department of Economics - Working Papers Series WP2011-037, Boston University - Department of Economics.
  17. Paula Bustos, 2009. "Trade liberalization, exports and technology upgrading: Evidence on the impact of MERCOSUR on Argentinean firms," Economics Working Papers 1173, Department of Economics and Business, Universitat Pompeu Fabra.
  18. Paola Conconi & Patrick Legros & Andrew F. Newman, 2008. "Trade Liberalization and Organizational Choice," Boston University - Department of Economics - The Institute for Economic Development Working Papers Series dp-172, Boston University - Department of Economics.
  19. Bombardini, Matilde, 2008. "Firm heterogeneity and lobby participation," Journal of International Economics, Elsevier, vol. 75(2), pages 329-348, July.
  20. Rodney D. Ludema & Anna Maria Mayda, 2010. "Do Terms-of-Trade Effects Matter for Trade Agreements? Evidence from WTO Countries," Development Working Papers 293, Centro Studi Luca d\'Agliano, University of Milano.
  21. Hart, Oliver, 1995. "Firms, Contracts, and Financial Structure," OUP Catalogue, Oxford University Press, number 9780198288817.
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Citations

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Cited by:
  1. Ferguson, Shon & Formai, Sara, 2011. "Institution-Driven Comparative Advantage, Complex Goods and Organizational Choice," Research Papers in Economics 2011:10, Stockholm University, Department of Economics.
  2. Andrew F. Newman & Patrick Legros & Paola Conconi, 2011. "Trade Liberalization and Organizational Change," Boston University - Department of Economics - Working Papers Series WP2011-037, Boston University - Department of Economics.
  3. Carlo Altomonte & Armando Rungi, 2013. "Business Groups as Hierarchies of Firms: Determinants of Vertical Integration and Performance," Working Papers 2013.33, Fondazione Eni Enrico Mattei.
  4. Emanuel Ornelas & John L. Turner, 2012. "Protection and International Sourcing," Economic Journal, Royal Economic Society, vol. 122(559), pages 26-63, 03.
  5. Pol Antràs & Stephen R.Yeaple, 2013. "Multinational Firms and the Structure of International Trade," NBER Working Papers 18775, National Bureau of Economic Research, Inc.
  6. Pol Antràs, 2011. "Grossman-Hart (1986) Goes Global: Incomplete Contracts, Property Rights, and the International Organization of Production," NBER Working Papers 17470, National Bureau of Economic Research, Inc.
  7. Ferguson, Shon & Formai, Sara, 2013. "Institution-driven comparative advantage and organizational choice," Journal of International Economics, Elsevier, vol. 90(1), pages 193-200.
  8. Pedro Mendi & Rafael Moner-Colonques & José Sempere-Monerris, 2011. "Vertical integration, collusion, and tariffs," SERIEs, Spanish Economic Association, vol. 2(3), pages 359-378, September.

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