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Global Sourcing if Contracts are Reference Points

  • Bohdan Kukharskyy
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    This paper presents econometric evidence for a link between a country’s level of egalitarianism and its inward foreign direct investment. In order to provide a theoretical rationale for this relationship, I embed Hart and Moore’s (2008) novel contractual foundation into a simple model of global sourcing with culturally dissimilar countries. Entrepreneurs can cooperate with foreign suppliers under two contractual modes: rigid and flexible. If suppliers consider original contracts as reference points and future is uncertain, a fundamental tradeoff arises between these two modes. By stipulating a range of possible outcomes, a flexible contract allows for future adaptation but is associated with ex post haggling cost. By specifying a single outcome, a rigid contract eliminates future disagreement but precludes beneficial adjustments to the occurring shocks. The key message of this paper is twofold: Due to lower haggling cost, the degree of contractual flexibility is higher in egalitarian countries. If future is uncertain, these countries are more attractive for international investors than less egalitarian ones.

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    File URL: http://www.bgpe.de/texte/DP/129_Kukharskyy.pdf
    File Function: First version, 2012
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    Paper provided by Bavarian Graduate Program in Economics (BGPE) in its series Working Papers with number 129.

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    Length: 41 pages
    Date of creation: Nov 2012
    Date of revision:
    Handle: RePEc:bav:wpaper:129_kukharskyy
    Contact details of provider: Web page: http://www.bgpe.de/

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    1. Oliver Hart & John Moore, 2008. "Contracts as Reference Points," The Quarterly Journal of Economics, MIT Press, vol. 123(1), pages 1-48, 02.
    2. Ernst Fehr & Oliver Hart & Christian Zehnder, 2011. "How do informal agreements and renegotiation shape contractual reference points?," ECON - Working Papers 043, Department of Economics - University of Zurich.
    3. Oliver Hart & Bengt Holmstrom, 2010. "A Theory of Firm Scope," The Quarterly Journal of Economics, MIT Press, vol. 125(2), pages 483-513, May.
    4. Elhanan Helpman, 2006. "Trade, FDI, and the Organization of Firms," Journal of Economic Literature, American Economic Association, vol. 44(3), pages 589-630, September.
    5. Oliver Hart & John Moore, 1998. "Foundations of Incomplete Contracts," Harvard Institute of Economic Research Working Papers 1846, Harvard - Institute of Economic Research.
    6. Oliver Hart & John Moore, 1988. "Property Rights and the Nature of the Firm," Working papers 495, Massachusetts Institute of Technology (MIT), Department of Economics.
    7. Hessel Oosterbeek & Randolph Sloof & Gijs van de Kuilen, 2004. "Cultural Differences in Ultimatum Game Experiments: Evidence from a Meta-Analysis," Experimental Economics, Springer, vol. 7(2), pages 171-188, 06.
    8. Oliver E. Williamson, 2000. "The New Institutional Economics: Taking Stock, Looking Ahead," Journal of Economic Literature, American Economic Association, vol. 38(3), pages 595-613, September.
    9. Siegel, Jordan I. & Licht, Amir N. & Schwartz, Shalom H., 2011. "Egalitarianism and international investment," Journal of Financial Economics, Elsevier, vol. 102(3), pages 621-642.
    10. Grossman, Sanford J. & Hart, Oliver D., 1986. "The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration," Scholarly Articles 3450060, Harvard University Department of Economics.
    11. Robert Gibbons, Editor & John Roberts, Editor, 2012. "The Handbook of Organizational Economics," Economics Books, Princeton University Press, edition 1, volume 1, number 9889, April.
    12. Fehr, Ernst & Hart, Oliver & Zehnder, Christian, 2008. "Contracts as Reference Points: Experimental Evidence," IZA Discussion Papers 3889, Institute for the Study of Labor (IZA).
    13. Oliver Hart, 2008. "Economica Coase Lecture Reference Points and the Theory of the Firm," Economica, London School of Economics and Political Science, vol. 75(299), pages 404-411, 08.
    14. James Konow, 2003. "Which Is the Fairest One of All? A Positive Analysis of Justice Theories," Journal of Economic Literature, American Economic Association, vol. 41(4), pages 1188-1239, December.
    15. Maskin, Eric & Tirole, Jean, 1999. "Two Remarks on the Property-Rights Literature," Review of Economic Studies, Wiley Blackwell, vol. 66(1), pages 139-49, January.
    16. Hoppe, Eva I & Schmitz, Patrick W, 2009. "Can Contracts Solve the Hold-Up Problem? Experimental Evidence," CEPR Discussion Papers 7205, C.E.P.R. Discussion Papers.
    17. Chad Syverson, 2010. "What Determines Productivity?," NBER Working Papers 15712, National Bureau of Economic Research, Inc.
    18. Oliver Hart & John Moore, 2007. "Incomplete Contracts and Ownership: Some New thoughts," American Economic Review, American Economic Association, vol. 97(2), pages 182-186, May.
    19. Robert E. Hall & Charles I. Jones, 1999. "Why Do Some Countries Produce So Much More Output per Worker than Others?," NBER Working Papers 6564, National Bureau of Economic Research, Inc.
    20. Gibbons, Robert, 2005. "Four forma(lizable) theories of the firm?," Journal of Economic Behavior & Organization, Elsevier, vol. 58(2), pages 200-245, October.
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