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Trade Liberalization and Organizational Change

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Author Info

  • Andrew F. Newman

    ()
    (Department of Economics, Boston University and CEPR)

  • Patrick Legros

    ()
    (Universite libre de Bruxelles (ECARES) and CEPR)

  • Paola Conconi

    (Universite Libre de Bruxelles (ECARES) and CEPR)

Abstract

We embed a simple incomplete-contracts model of organization design in a standard two-country perfectly-competitive trade model to examine how the liberalization of product and factor markets affects the ownership structure of firms. In our model, managers decide whether or not to integrate their firms, trading off the pecuniary benefits of coordinating production decisions with the private benefits of operating in their preferred ways. The price of output is a crucial determinant of this choice, since it affects the size of the pecuniary benefits. Organizational choices also depend on the terms of trade in supplier markets, which affect the division of surplus between managers. We show that, even when firms do not relocate across countries, the price changes triggered by the liberalization of product markets can lead to changes in ownership structures within countries. The removal of barriers to factor mobility can also induce widespread restructuring, which can lead to increases in product prices (or declines in quality), hurting consumers worldwide.

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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 WP2011-037.

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Length: 31 pages
Date of creation: Jan 2011
Date of revision:
Handle: RePEc:bos:wpaper:wp2011-037

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Related research

Keywords: Theory of the Firm; Incomplete Contracts; Globalization;

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References

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  1. Patrick Legros & Andrew F. Newman, 2008. "Competing for Ownership," Journal of the European Economic Association, MIT Press, vol. 6(6), pages 1279-1308, December.
  2. Marin, Dalia & Verdier, Thierry, 2003. "Globalization and the new enterprise," Munich Reprints in Economics 19256, University of Munich, Department of Economics.
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  8. Maria Guadalupe & Julie Wulf, 2008. "The Flattening Firm and Product Market Competition: The Effect of Trade Liberalization," NBER Working Papers 14491, National Bureau of Economic Research, Inc.
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  14. Oliver Hart & Bengt Holmstrom, 2008. "A Theory of Firm Scope," NBER Working Papers 14613, National Bureau of Economic Research, Inc.
  15. Patrick Legros & Andrew Newman, 2013. "A Price Theory of Vertical and Lateral Integration," ULB Institutional Repository 2013/141436, ULB -- Universite Libre de Bruxelles.
  16. Guadalupe, Maria & Wulf, Julie, 2009. "The Flattening Firm and Product Market Competition," CEPR Discussion Papers 7253, C.E.P.R. Discussion Papers.
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  25. Patrick Legros & Andrew F. Newman, 2008. "Competitive Prices and Organizational Choices," Boston University - Department of Economics - The Institute for Economic Development Working Papers Series dp-173, Boston University - Department of Economics.
  26. Diego Puga & Daniel Trefler, 2007. "Wake up and Smell the Ginseng: International Trade and the Rise of Incremental Innovation in Low-Wage Countries," Development Working Papers 222, Centro Studi Luca d\'Agliano, University of Milano.
  27. Pavcnik, Nina, 2002. "Trade Liberalization, Exit, and Productivity Improvement: Evidence from Chilean Plants," Review of Economic Studies, Wiley Blackwell, vol. 69(1), pages 245-76, January.
  28. Mussa, Michael, 1974. "Tariffs and the Distribution of Income: The Importance of Factor Specificity, Substitutability, and Intensity in the Short and Long Run," Journal of Political Economy, University of Chicago Press, vol. 82(6), pages 1191-1203, Nov.-Dec..
  29. Patrick Legros & Andrew F. Newman, 2006. "Managerial Firms, Organizational Choice, and Consumer Welfare," Boston University - Department of Economics - Working Papers Series WP2006-059, Boston University - Department of Economics.
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