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Managerial Incentives and the International Organization of Production

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  • Gene M. Grossman
  • Elhanan Helpman

Abstract

We develop a model in which the heterogeneous firms in an industry choose their modes of organization and the location of their subsidiaries or suppliers. We assume that the principals of a firm are constrained in the nature of the contracts they can write with suppliers or employees. Our main result concerns the sorting of firms with different productivity levels into different organizational forms. We use the model to examine the implications of falling trade costs for the relevant prevalence of outsourcing and foreign direct investment.

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Paper provided by Harvard - Institute of Economic Research in its series Harvard Institute of Economic Research Working Papers with number 1987.

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Date of creation: 2002
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Handle: RePEc:fth:harver:1987

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References

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  1. Gene M. Grossman & Elhanan Helpman, 2005. "Outsourcing in a Global Economy," Review of Economic Studies, Oxford University Press, vol. 72(1), pages 135-159.
  2. Robert Feenstra & Gordon Hanson, 2001. "Global Production Sharing and Rising Inequality: A Survey of Trade and Wages," NBER Working Papers 8372, National Bureau of Economic Research, Inc.
  3. Robert Feenstra, 2003. "Integration Of Trade And Disintegration Of Production In The Global Economy," Working Papers 986, University of California, Davis, Department of Economics.
  4. Grossman, Gene & Helpman, Elhanan, 2003. "Managerial Incentives and the International Organization of Production," CEPR Discussion Papers 3737, C.E.P.R. Discussion Papers.
  5. Gordon H. Hanson & Raymond J. Mataloni & Matthew J. Slaughter, 2001. "Expansion Strategies of U.S. Multinational Firms," BEA Papers 0012, Bureau of Economic Analysis.
  6. James R. Markusen, 1998. "Contracts, Intellectual Property Rights, and Multinational Investment in Developing Countries," NBER Working Papers 6448, National Bureau of Economic Research, Inc.
  7. Ethier, Wilfred J, 1986. "The Multinational Firm," The Quarterly Journal of Economics, MIT Press, vol. 101(4), pages 805-33, November.
  8. Chu-Chia S. Lin & Ivan Png, 2003. "Monitoring costs and the mode of international investment," Journal of Economic Geography, Oxford University Press, vol. 3(3), pages 261-274, July.
  9. Lawrence F. Katz, 1986. "Efficiency Wage Theories: A Partial Evaluation," NBER Working Papers 1906, National Bureau of Economic Research, Inc.
  10. Horn, Henrik & Lang, Harald & Lundgren, Stefan, 1995. "Managerial effort incentives, X-inefficiency and international trade," European Economic Review, Elsevier, vol. 39(1), pages 117-138, January.
  11. Ethier, Wilfred J. & Markusen, James R., 1996. "Multinational firms, technology diffusion and trade," Journal of International Economics, Elsevier, vol. 41(1-2), pages 1-28, August.
  12. David Hummels & Dana Rapoport & Kei-Mu Yi, 1998. "Vertical specialization and the changing nature of world trade," Economic Policy Review, Federal Reserve Bank of New York, issue Jun, pages 79-99.
  13. Ignatius Horstmann & James R. Markusen, 1987. "Licensing versus Direct Investment: A Model of Internalization by the Multinational Enterprise," Canadian Journal of Economics, Canadian Economics Association, vol. 20(3), pages 464-81, August.
  14. Marc J. Melitz, 2003. "The Impact of Trade on Intra-Industry Reallocations and Aggregate Industry Productivity," Econometrica, Econometric Society, vol. 71(6), pages 1695-1725, November.
  15. Hummels, David & Ishii, Jun & Yi, Kei-Mu, 2001. "The nature and growth of vertical specialization in world trade," Journal of International Economics, Elsevier, vol. 54(1), pages 75-96, June.
  16. Holmstrom, Bengt & Milgrom, Paul, 1991. "Multitask Principal-Agent Analyses: Incentive Contracts, Asset Ownership, and Job Design," Journal of Law, Economics and Organization, Oxford University Press, vol. 7(0), pages 24-52, Special I.
  17. Gordon H. Hanson & Raymond J. Mataloni & Matthew J. Slaughter, 2005. "Vertical Production Networks in Multinational Firms," The Review of Economics and Statistics, MIT Press, vol. 87(4), pages 664-678, November.
  18. Jose Campa & Linda S. Goldberg, 1997. "The evolving external orientation of manufacturing: a profile of four countries," Economic Policy Review, Federal Reserve Bank of New York, issue Jul, pages 53-81.
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