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Incomplete Contracts and the Product Cycle

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Pol Antrà s

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Abstract

The incomplete nature of contracts governing international transactions limits the extent to which the production process can be fragmented across borders. In a dynamic, general-equilibrium Ricardian model of North-South trade, the incompleteness of international contracts is shown to lead to the emergence of product cycles. Because of contractual frictions, goods are initially manufactured in the North, where product development takes place. As the good matures and becomes more standardized, the manufacturing stage of production is shifted to the South to benefit from lower wages. Following the property-rights approach to the theory of the firm, the same force that creates product cycles, i.e., incomplete contracts, opens the door to a parallel analysis of the determinants of the mode of organization. The model gives rise to a new version of the product cycle in which manufacturing is shifted to the South first within firm boundaries, and only at a later stage to independent firms in the South. Relative to a world with only arm's length transacting, allowing for intrafirm production transfer by multinational firms is shown to accelerate the shift of production towards the South, while having an ambiguous effect on relative wages. The model delivers macroeconomic implications that complement the work of Krugman (1979), as well as microeconomic implications consistent with the findings of the empirical literature on the product cycle.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 9945.

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Date of creation: Sep 2003
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Handle: RePEc:nbr:nberwo:9945

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Find related papers by JEL classification:
D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies

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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.:
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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. Puga, Diego & Trefler, Daniel, 2005. "Wake Up and Smell the Ginseng: The Rise of Incremental Innovation in Low-Wage Countries," CEPR Discussion Papers 5286, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  2. Devashish Mitra & Priya Ranjan, 2007. "Temporary Shocks and Offshoring: The Role of External Economies and Firm Heterogeneity," IZA Discussion Papers 2811, Institute for the Study of Labor (IZA). [Downloadable!]
  3. Gancia, Gino, 2003. "Globalization, Divergence and Stagnation," Seminar Papers 720, Stockholm University, Institute for International Economic Studies. [Downloadable!]
    Other versions:
  4. Khandelwal, Amit, 2006. "The Long and Short (of) Quality Ladders," MPRA Paper 4496, University Library of Munich, Germany, revised May 2008. [Downloadable!]
  5. James Markusen, 2005. "Modeling the Offshoring of White-Collar Services: From Comparative Advantage to the New Theories of Trade and FDI," NBER Working Papers 11827, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  6. Pol Antras, 2005. "Incomplete Contracts and the Product Cycle," American Economic Review, American Economic Association, vol. 95(4), pages 1054-1073, September. [Downloadable!] (restricted)
    Other versions:
  7. Ping Wang & Raymond Riezman, 2008. "Preference Bias and Outsourcing to Market: A Steady-State Analysis," CESifo Working Paper Series CESifo Working Paper No. , CESifo GmbH. [Downloadable!]
  8. Laura Alfaro & Areendam Chanda & Sebnem Kalemli-Ozcan & Selin Sayek, 2006. "How Does Foreign Direct Investment Promote Economic Growth? Exploring the Effects of Financial Markets on Linkages," DEGIT Conference Papers c011_023, DEGIT, Dynamics, Economic Growth, and International Trade. [Downloadable!]
    Other versions:
  9. Pol Antràs & Elhanan Helpman, 2006. "Contractual Frictions and Global Sourcing," NBER Working Papers 12747, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  10. Naghavi, Alireza & Ottaviano, Gianmarco I P, 2006. "Offshoring and Product Innovation," CEPR Discussion Papers 6008, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  11. Debaere, Peter & Mostashari, Shalah, 2005. "Do Tariffs Matter for the Extensive Margin of International Trade? An Empirical Analysis," CEPR Discussion Papers 5260, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  12. Pol Antràs & Elhanan Helpman, 2003. "Global Sourcing," NBER Working Papers 10082, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  13. Daron Acemoglu & Pol Antràs & Elhanan Helpman, 2005. "Contracts and the Division of Labor," NBER Working Papers 11356, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  14. Nathan Nunn, 2005. "Relationship Specificity, Incomplete Contracts and the Pattern of Trade," International Trade 0512018, EconWPA. [Downloadable!]
    Other versions:
  15. Pol Antràs & Luis Garicano & Esteban Rossi-Hansberg, 2005. "Offshoring in a Knowledge Economy," NBER Working Papers 11094, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  16. Christian Keuschnigg & Evelyn Ribi, 2007. "Outsourcing, Unemployment and Welfare Policy," University of St. Gallen Department of Economics working paper series 2007 2007-41, Department of Economics, University of St. Gallen. [Downloadable!]
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