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Trade Liberalization and Organizational Change

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Author Info
Paola Conconi
Patrick Legros
Andrew F. Newman

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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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Publisher Info
Paper provided by Université Libre de Bruxelles, Ecares in its series ECARES Working Papers with number 2008_025.

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Length: 32 pages
Date of creation: 2008
Date of revision:
Handle: RePEc:eca:wpaper:2008_025

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Related research
Keywords: Firms; Contracts; Globalization;

Other versions of this item:

Find related papers by JEL classification:
D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business

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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. Patrick Legros & Andrew F. Newman, 2008. "Competing for Ownership," Journal of the European Economic Association, MIT Press, vol. 6(6), pages 1279-1308, December. [Downloadable!] (restricted)
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  2. 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. [Downloadable!]
  3. Antràs, Pol & Helpman, Elhanan, 2004. "Global Sourcing," CEPR Discussion Papers 4170, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  4. Marin, Dalia & Verdier, Thierry, 2002. "Globalization and the 'New Enterprise'," CEPR Discussion Papers 3640, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  5. 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. [Downloadable!] (restricted)
  6. Hart, Oliver & Moore, John, 1990. "Property Rights and the Nature of the Firm," Journal of Political Economy, University of Chicago Press, vol. 98(6), pages 1119-58, December. [Downloadable!] (restricted)
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  7. Legros, Patrick & Newman, Andrew F., 1996. "Wealth Effects, Distribution, and the Theory of Organization," Journal of Economic Theory, Elsevier, vol. 70(2), pages 312-341, August. [Downloadable!] (restricted)
  8. Breinlich, Holger, 2008. "Trade liberalization and industrial restructuring through mergers and acquisitions," Journal of International Economics, Elsevier, vol. 76(2), pages 254-266, December. [Downloadable!] (restricted)
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  9. Pol Antràs & Robert W. Staiger, 2008. "Offshoring and the Role of Trade Agreements," NBER Working Papers 14285, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  10. Grossman, Sanford J & Hart, Oliver D, 1986. "The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration," Journal of Political Economy, University of Chicago Press, vol. 94(4), pages 691-719, August. [Downloadable!] (restricted)
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  11. Pol Antràs, 2003. "Firms, Contracts, And Trade Structure," The Quarterly Journal of Economics, MIT Press, vol. 118(4), pages 1375-1418, November. [Downloadable!] (restricted)
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  12. Daron Acemoglu & Simon Johnson & Todd Mitton, 2009. "Determinants of Vertical Integration: Financial Development and Contracting Costs," Journal of Finance, American Finance Association, vol. 64(3), pages 1251-1290, 06. [Downloadable!] (restricted)
  13. John McLaren, 2000. ""Globalization" and Vertical Structure," American Economic Review, American Economic Association, vol. 90(5), pages 1239-1254, December. [Downloadable!] (restricted)
  14. Nina Pavcnik, 2000. "Trade Liberalization, Exit, and Productivity Improvements: Evidence from Chilean Plants," NBER Working Papers 7852, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  15. 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. [Downloadable!]
  16. 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. [Downloadable!] (restricted)
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  17. James A. Schmitz, Jr., 2005. "What determines productivity? lessons from the dramatic recovery of the U.S. and Canadian iron-ore industries following their early 1980s crisis," Staff Report 286, Federal Reserve Bank of Minneapolis. [Downloadable!]
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  18. Gene M. Grossman & Elhanan Helpman, 2002. "Integration Versus Outsourcing In Industry Equilibrium," The Quarterly Journal of Economics, MIT Press, vol. 117(1), pages 85-120, February. [Downloadable!] (restricted)
  19. Dr. Peter Kenning & Hilke Plassmann, 2004. "NeuroEconomics," Experimental 0412005, EconWPA. [Downloadable!]
  20. Daniel Trefler, 2006. "The Long and Short of the Canada-U.S. Free Trade Agreement," STICERD - Economics of Industry Papers 41, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE. [Downloadable!]
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  21. Grossman, Gene M. & Helpman, Elhanan, 2004. "Managerial incentives and the international organization of production," Journal of International Economics, Elsevier, vol. 63(2), pages 237-262, July. [Downloadable!] (restricted)
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Full references

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. Legros, Patrick & Newman, Andrew, 2009. "A Price Theory of Vertical and Lateral Integration," CEPR Discussion Papers 7211, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  2. Emanuel Ornelas & John L. Turner, 2008. "Protection and International Sourcing," CEP Discussion Papers dp0900, Centre for Economic Performance, LSE. [Downloadable!]
  3. 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. [Downloadable!]
  4. Maria Guadalupe & Julie M. Wulf, 2008. "The Flattening Firm and Product Market Competition: The Effect of Trade Liberalization," Harvard Business School Working Papers 09-067, Harvard Business School. [Downloadable!]
    Other versions:
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