Effects of Adverse Selection on a Multinational Firm’s Decision on where to Subcontract
The present paper analyses the multinational firm's decision on where to subcontract in a context of asymmetric information. When a multinational firm (MNF) intends to subcontract the production of a good to a foreign firm, it faces an adverse selection problem. In fact, at the outset, foreign firms (agents) have an information advantage relative to the MNF with respect to their true production costs, which is not available to the MNF (principal). Methodologically, we adapt the general model of adverse selection to the particular case of the choice of the country on where to subcontract. We then compare the equilibrium obtained with the one which would occur in a context absent of adverse selection. Furthermore, we analyze the sensibility of the equilibrium and of a MNF's profits to changes in the parameters of the model. Since the subcontracting relationship is, generally, materialised through the accomplishment of a contract between the MNF and the foreign firm, the decision of the country on where to subcontract relates to the choice of the best contract, from the MNF's point of view, to offer to the foreign firm. Adverse selection modelling outcomes justify and are coherent with empirical evidence such as, the diversity of countries that MNFs subcontract and the fast production relocation between countries.
(This abstract was borrowed from another version of this item.)
Volume (Year): 8 (2008)
Issue (Month): 2 (June)
|Contact details of provider:|| Web page: http://springerlink.metapress.com/link.asp?id=105724|
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.:
- Deborah L. Swenson, 2004.
"Overseas Assembly and Country Sourcing Choices,"
NBER Working Papers
10697, National Bureau of Economic Research, Inc.
- Gene M. Grossman & Elhanan Helpman, 2002.
"Outsourcing in a Global Economy?,"
Harvard Institute of Economic Research Working Papers
1966, Harvard - Institute of Economic Research.
- Gene M. Grossman & Elhanan Helpman, 2002. "Outsourcing in a Global Economy," NBER Working Papers 8728, National Bureau of Economic Research, Inc.
- Grossman, G.M. & Helpman, E., 2002. "Outsourcing in a Global Economy," Papers 218, Princeton, Woodrow Wilson School - Public and International Affairs.
- Grossman, Gene & Helpman, Elhanan, 2002. "Outsourcing in a Global Economy," CEPR Discussion Papers 3165, C.E.P.R. Discussion Papers.
- Gene M. Grossman & Elhanan Helpman, 2002. "Outsourcing in a Global Economy," Working Papers 149, Princeton University, Woodrow Wilson School of Public and International Affairs, Discussion Papers in Economics.
- Grossman, Gene M. & Helpman, Elhanan, 2005. "Outsourcing in a Global Economy," Scholarly Articles 25586654, Harvard University Department of Economics.
- Robert C. Feenstra, 1998.
"Integration of Trade and Disintegration of Production in the Global Economy,"
Journal of Economic Perspectives,
American Economic Association, vol. 12(4), pages 31-50, Fall.
- Robert Feenstra, 2003. "Integration Of Trade And Disintegration Of Production In The Global Economy," Working Papers 986, University of California, Davis, Department of Economics.
- Robert C. Feenstra, . "Integration Of Trade And Disintegration Of Production In The Global Economy," Department of Economics 98-06, California Davis - Department of Economics.
- Katharine G. Abraham & Susan K. Taylor, 1993.
"Firms' Use of Outside Contractors: Theory and Evidence,"
NBER Working Papers
4468, National Bureau of Economic Research, Inc.
- Abraham, Katharine G & Taylor, Susan K, 1996. "Firms' Use of Outside Contractors: Theory and Evidence," Journal of Labor Economics, University of Chicago Press, vol. 14(3), pages 394-424, July.
- Das, Satya P, 1999. "Direct Foreign Investment versus Licensing," Review of Development Economics, Wiley Blackwell, vol. 3(1), pages 86-97, February.
- Vining, Aidan & Globerman, steven, 1999. "A conceptual framework for understanding the outsourcing decision," European Management Journal, Elsevier, vol. 17(6), pages 645-654, December.
When requesting a correction, please mention this item's handle: RePEc:kap:jincot:v:8:y:2008:i:2:p:133-146. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Sonal Shukla)or (Rebekah McClure)
If references are entirely missing, you can add them using this form.