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Starting Small in an Unfamiliar Environment

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Author Info
James E. Rauch (UCLA, San Diego & NBER)
Joel Watson (Dept. Economics, UCLA, San Diego)

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Abstract

Motivated by a characteristic way in which firms in developed countries make their decisions regarding cooperation with potential partners from less developed countries, we design a simple model of a DC firm's search for an LDC partner/supplier and the subsequent relationship between the two parties. Matched firms can "start small" with a trial order or pilot project of variable size in order to gain information about the ability of the LDC firm to successfully carry out a large project. We derive results relating whether and how the parties start small to the characteristics of the large project and to the matching environment. Among other results, we show how risk and search cost are associated with the propensity to start small and we establish a connection between starting small and the expected longevity of successful partnerships. We also address methods of contract enforcement and demonstrate the relationship between starting small and monitoring.

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File URL: http://cowles.econ.yale.edu/P/cd/d12a/d1218.pdf
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Publisher Info
Paper provided by Cowles Foundation, Yale University in its series Cowles Foundation Discussion Papers with number 1218.

Download reference. The following formats are available: HTML, plain text, BibTeX, RIS (EndNote), ReDIF
Length: 35 pages
Date of creation: May 1999
Date of revision:
Handle: RePEc:cwl:cwldpp:1218

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Garey Ramey & Joel Watson, 1996. "Bilateral Trade and Opportunism in a Matching Market," University of California at San Diego, Economics Working Paper Series 96-08, Department of Economics, UC San Diego. [Downloadable!]
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  2. Saikat Datta, 1996. "Building Trust," STICERD - Theoretical Economics Paper Series 305, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE.
  3. Ghosh, Parikshit & Ray, Debraj, 1996. "Cooperation in Community Interaction without Information Flows," Review of Economic Studies, Blackwell Publishing, vol. 63(3), pages 491-519, July. [Downloadable!] (restricted)
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  4. Kandori, Michihiro, 1992. "Social Norms and Community Enforcement," Review of Economic Studies, Blackwell Publishing, vol. 59(1), pages 63-80, January. [Downloadable!] (restricted)
  5. Greif, Avner, 1993. "Contract Enforceability and Economic Institutions in Early Trade: the Maghribi Traders' Coalition," American Economic Review, American Economic Association, vol. 83(3), pages 525-48, June. [Downloadable!] (restricted)
  6. Wouter J. den Haan & Garey Ramey & Joel Watson, 1999. "Contract-Theoretic Approaches to Wages and Displacement," Cowles Foundation Discussion Papers 1216, Cowles Foundation, Yale University. [Downloadable!]
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  7. Jovanovic, Boyan, 1979. "Job Matching and the Theory of Turnover," Journal of Political Economy, University of Chicago Press, vol. 87(5), pages 972-90, October. [Downloadable!] (restricted)
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  8. H. Lorne Carmichael & W. Bentley MacLeod, 1997. "Gift Giving and the Evolution of Cooperation," Boston College Working Papers in Economics 338., Boston College Department of Economics. [Downloadable!]
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  9. Kranton, Rachel E, 1996. "The Formation of Cooperative Relationships," Journal of Law, Economics and Organization, Oxford University Press, vol. 12(1), pages 214-33, April.
  10. Egan, Mary Lou & Mody, Ashoka, 1992. "Buyer-seller links in export development," World Development, Elsevier, vol. 20(3), pages 321-334, March. [Downloadable!] (restricted)
  11. Watson, Joel, 1999. "Starting Small and Renegotiation," Journal of Economic Theory, Elsevier, vol. 85(1), pages 52-90, March. [Downloadable!] (restricted)
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  12. Horstmann, Ignatius J & Markusen, James R, 1996. "Exploring New Markets: Direct Investment, Contractual Relations and the Multinational Enterprise," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 37(1), pages 1-19, February.
    Other versions:
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Tibor Besedes, . "A Search Cost Perspective on Duration of Trade," Departmental Working Papers 2006-12, Department of Economics, Louisiana State University. [Downloadable!]
  2. Rubén Segura-Cayuela & Josep M. Vilarrubia, 2008. "Uncertainty and entry into export markets," Banco de España Working Papers 0811, Banco de España. [Downloadable!]
  3. Holger Görg, Frances Ruane, 2001. "Multinational Companies and Linkages: Panel-Data Evidence for the Irish Electronics Sector," International Journal of the Economics of Business, Taylor and Francis Journals, vol. 8(1), pages 1-18, February. [Downloadable!] (restricted)
  4. Deborah Swenson, 2005. "Outsourcing Price Decisions: Evidence from U.S. 9802 Imports," NBER Working Papers 11184, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  5. Ottorino Chillemi & Benedetto Gui & Lorenzo Rocco, 2005. "On the economic value of repeated interactions under adverse selection," "Marco Fanno" Working Papers 0007, Dipartimento di Scienze Economiche "Marco Fanno". [Downloadable!]
  6. Deborah L. Swenson, 2007. "Multinationals and the Creation of Chinese Trade Linkages," NBER Working Papers 13271, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  7. Joel Watson, 1999. "Starting Small and Commitment," Cowles Foundation Discussion Papers 1217, Cowles Foundation, Yale University. [Downloadable!]
    Other versions:
  8. Jonathan Eaton & Marcela Eslava & Maurice Kugler & James Tybout, 2007. "Export Dynamics in Colombia: Firm-Level Evidence," NBER Working Papers 13531, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  9. Luis Araujo & Emanuel Ornelas, 2005. "Trust-Based Trade," IBMEC RJ Economics Discussion Papers 2005-08, Economics Research Group, IBMEC Business School - Rio de Janeiro. [Downloadable!]
    Other versions:
  10. Jonathan Eaton & Marcela Eslava & Maurice Kugler & James Tybout, 2008. "Export Dynamics in Colombia: Transactions Level Evidence," BORRADORES DE ECONOMIA 004748, BANCO DE LA REPÚBLICA. [Downloadable!]
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