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Trade Liberalization and Organizational Change

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  • Paola Conconi

    (Université Libre de Bruxelles, ECARES and CEPR)

  • Patrick Legros

    (Université Libre de Bruxelles, ECARES and CEPR)

  • Andrew F. Newman

    (Boston University 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. In particular, non-integration is chosen at “low” and “high” prices, while integration occurs at moderate prices. Organizational choices also depend on the terms of trade in supplier markets, which affect the division of surplus between managers. We obtain three main results. First, even when firms do not relocate across countries, the price changes triggered by liberalization of product markets can lead to significant organizational restructuring within countries. Second, the removal of barriers to factor mobility can lead to inefficient reorganization and adversely affect consumers. Third, “deep integration” the liberalization of both product and factor markets ­ leads to the convergence of organizational design across countries.

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Bibliographic Info

Paper provided by Centro Studi Luca d\'Agliano, University of Milano in its series Development Working Papers with number 262.

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Length: 32
Date of creation: 27 Oct 2008
Date of revision:
Handle: RePEc:csl:devewp:262

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Keywords: Firms; Contracts; Globalization;

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