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Trade Liberalization and Organizational Choice

  • Paola Conconi

    ()

    (Universite Libre de Bruxelles (ECARES) and CEPR)

  • Patrick Legros

    ()

    (Universite Libre de Bruxelles (ECARES) and CEPR)

  • Andrew F. Newman

    ()

    (Boston University and CEPR)

We embed a simple incomplete-contracts model of organization design in a standard two-country, perfectly-competitive trade model to examine how the liberalization of product and factor markets affects the ownership structure of firms. In our model, managers decide whether or not to integrate their firms, trading off the pecuniary benefits of coordinating production decisions with the private benefits of operating in their preferred ways. The price of output is a crucial determinant of this choice, since it affects the size of the pecuniary benefits. In particular, non-integration is chosen at "low" and "high" prices, while integration occurs only at moderate prices. Organizational choices also depend on the terms of trade in supplier markets, which affect the division of surplus between managers. We obtain three main results. First, joint product and factor market integration leads to the convergence of organization design across countries. Second, even in the absence of factor movements, the price changes triggered by liberalization of product markets can lead to significant organizational restructuring within countries. Third, the removal of barriers to factor mobility can induce further organizational changes, sometimes adversely affecting consumers, which suggests a potential complementarity between trade policy and corporate governance policy.

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Paper provided by Boston University - Department of Economics in its series Boston University - Department of Economics - The Institute for Economic Development Working Papers Series with number dp-172.

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Length: 26 pages
Date of creation: May 2008
Date of revision:
Handle: RePEc:bos:iedwpr:dp-172
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Web page: http://www.bu.edu/econ/

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  1. Antràs, Pol & Helpman, Elhanan, 2004. "Global Sourcing," CEPR Discussion Papers 4170, C.E.P.R. Discussion Papers.
  2. Hart, Oliver D. & Moore, John, 1990. "Property Rights and the Nature of the Firm," Scholarly Articles 3448675, Harvard University Department of Economics.
  3. Maria Guadalupe & Julie M. Wulf, 2008. "The Flattening Firm and Product Market Competition: The Effect of Trade Liberalization," Harvard Business School Working Papers 09-067, Harvard Business School.
  4. 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.
  5. Antras, Pol, 2003. "Firms, Contracts, and Trade Structure," Scholarly Articles 3196328, Harvard University Department of Economics.
  6. Gene M. Grossman & Elhanan Helpman, 2002. "Integration Versus Outsourcing In Industry Equilibrium," The Quarterly Journal of Economics, MIT Press, vol. 117(1), pages 85-120, February.
  7. James A. Schmitz, Jr., 2005. "What determines productivity? lessons from the dramatic recovery of the U.S. and Canadian iron-ore industries following their early 1980s crisis," Staff Report 286, Federal Reserve Bank of Minneapolis.
  8. Ornelas, Emanuel & Turner, John L., 2008. "Trade liberalization, outsourcing, and the hold-up problem," Journal of International Economics, Elsevier, vol. 74(1), pages 225-241, January.
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  13. Gene M. Grossman & Elhanan Helpman, 2002. "Managerial Incentives and the International Organization of Production," Working Papers 147, Princeton University, Woodrow Wilson School of Public and International Affairs, Discussion Papers in Economics..
  14. Antràs, Pol & Staiger, Robert, 2008. "Offshoring and the Role of Trade Agreements," CEPR Discussion Papers 6966, C.E.P.R. Discussion Papers.
  15. Nina Pavcnik, 2000. "Trade Liberalization, Exit, and Productivity Improvements: Evidence from Chilean Plants," NBER Working Papers 7852, National Bureau of Economic Research, Inc.
  16. Legros, Patrick & Newman, Andrew F., 1996. "Wealth Effects, Distribution, and the Theory of Organization," Journal of Economic Theory, Elsevier, vol. 70(2), pages 312-341, August.
  17. Marin, Dalia & Verdier, Thierry, 2006. "Power Inside the Firm and the Market: A General Equilibrium Approach," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 109, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
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