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Contract Incompleteness, Globalization and Vertical Structure: an Empirical Analysis

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  • Luigi Pascali

    () (Boston College)

Abstract

This paper studies the effects of international openness and contracting institutions on vertical integration. It first derives a number of predictions regarding the interactions between trade barriers, contracting costs, technology intensity, and the extent of vertical integration from a simple model with incomplete contracts. Then it investigates these predictions using a new dataset of over 14000 firms from 45 developing countries. Consistent with theory, the effect of technology intensity of domestic producers on their likelihood to vertically integrate is decreasing in the quality of domestic contracting institutions and in international openness. Contract enforcing costs are particularly high in developing countries and their effects on the vertical structure of technological intensive firms may have significant welfare costs. If improving domestic contracting institutions is not feasible an equivalent solution is to increase openness to international trade. This would discipline domestic suppliers reducing the need for vertical integration.

Suggested Citation

  • Luigi Pascali, 2009. "Contract Incompleteness, Globalization and Vertical Structure: an Empirical Analysis," Boston College Working Papers in Economics 727, Boston College Department of Economics.
  • Handle: RePEc:boc:bocoec:727
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    References listed on IDEAS

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    Cited by:

    1. Tarziján, Jorge, 2013. "The emergence of world-class companies in Chile: Analysis of cases and a framework to assess integration decisions," Journal of Business Research, Elsevier, vol. 66(10), pages 1728-1735.
    2. Du, Julan & Lu, Yi & Tao, Zhigang, 2012. "Contracting institutions and vertical integration: Evidence from China’s manufacturing firms," Journal of Comparative Economics, Elsevier, vol. 40(1), pages 89-107.

    More about this item

    Keywords

    Vertical integration; Hold-up; Incomplete contracts; Trade openness;

    JEL classification:

    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • F15 - International Economics - - Trade - - - Economic Integration
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation

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