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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
Contact details of provider: Postal: 270 Bay State Road, Boston, MA 02215
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Web page: http://www.bu.edu/econ/

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