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Contractual Frictions and Global Sourcing

  • Pol Antras
  • Elhanan Helpman

We generalize the Antràs and Helpman (2004) model of the international organization of production in order to accommodate varying degrees of contractual frictions. In particular, we allow the degree of contractibility to vary across inputs and countries. A continuum of firms with heterogeneous productivities decide whether to integrate or outsource the production of intermediate inputs, and from which country to source them. Final-good producers and their suppliers make relationship-specific investments which are only partially contractible, both in an integrated firm and in an arm’s-length relationship. We describe equilibria in which firms with different productivity levels choose different ownership structures and supplier locations, and then study the effects of changes in the quality of contractual institutions on the relative prevalence of these organizational forms. Better contracting institutions in the South raise the prevalence of offshoring, but may reduce the relative prevalence of FDI or foreign outsourcing. The impact on the composition of offshoring depends on whether the institutional improvement affects disproportionately the contractibility of a particular input. A key message of the paper is that improvements in the contractibility of inputs controlled by final-good producers have different effects than improvements in the contractibility of inputs controlled by suppliers.

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Paper provided by UCLA Department of Economics in its series Levine's Bibliography with number 321307000000000810.

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Date of creation: 26 Jan 2007
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Handle: RePEc:cla:levrem:321307000000000810
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  1. Pol Antras, 2004. "Incomplete Contracts and the Product Cycle," Econometric Society 2004 North American Summer Meetings 62, Econometric Society.
  2. Andrew B. Bernard & J. Bradford Jensen & Peter K. Schott, 2005. "Importers, Exporters, and Multinationals: A Portrait of Firms in the U.S. that Trade Goods," NBER Working Papers 11404, National Bureau of Economic Research, Inc.
  3. Antràs, Pol & Helpman, Elhanan, 2004. "Global Sourcing," CEPR Discussion Papers 4170, C.E.P.R. Discussion Papers.
  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. Nathan Nunn, 2007. "Relationship-Specificity, Incomplete Contracts, and the Pattern of Trade," The Quarterly Journal of Economics, MIT Press, vol. 122(2), pages 569-600, 05.
  6. Melitz, Marc J, 2002. "The Impact of Trade on Intra-Industry Reallocations and Aggregate Industry Productivity," CEPR Discussion Papers 3381, C.E.P.R. Discussion Papers.
  7. Hart, Oliver D. & Moore, John, 1990. "Property Rights and the Nature of the Firm," Scholarly Articles 3448675, Harvard University Department of Economics.
  8. repec:rus:hseeco:122439 is not listed on IDEAS
  9. Bernard, Andrew B. & Bradford Jensen, J., 1999. "Exceptional exporter performance: cause, effect, or both?," Journal of International Economics, Elsevier, vol. 47(1), pages 1-25, February.
  10. repec:hrv:faseco:4784029 is not listed on IDEAS
  11. Hummels, David & Ishii, Jun & Yi, Kei-Mu, 2001. "The nature and growth of vertical specialization in world trade," Journal of International Economics, Elsevier, vol. 54(1), pages 75-96, June.
  12. Pol Antràs, 2003. "Firms, Contracts, And Trade Structure," The Quarterly Journal of Economics, MIT Press, vol. 118(4), pages 1375-1418, November.
  13. Helpman, Elhanan, 2006. "Trade, FDI and the Organization of Firms," CEPR Discussion Papers 5589, C.E.P.R. Discussion Papers.
  14. Andrew B Bernard & Jonathan Eaton & J. Bradford Jensen & Samuel Kortum, 2000. "Plants and productivity in international trade," Working Papers 00-08, Center for Economic Studies, U.S. Census Bureau.
  15. Elhanan Helpman & Marc J. Melitz & Stephen R. Yeaple, 2003. "Export versus FDI," NBER Working Papers 9439, National Bureau of Economic Research, Inc.
  16. Robert C. Feenstra & Gordon H. Hanson, 1996. "Globalization, Outsourcing, and Wage Inequality," NBER Working Papers 5424, National Bureau of Economic Research, Inc.
  17. Daron Acemoglu & Pol Antràs & Elhanan Helpman, 2007. "Contracts and Technology Adoption," American Economic Review, American Economic Association, vol. 97(3), pages 916-943, June.
  18. Jose Campa & Linda S. Goldberg, 1997. "The evolving external orientation of manufacturing: a profile of four countries," Economic Policy Review, Federal Reserve Bank of New York, issue Jul, pages 53-81.
  19. Yeaple, Stephen & Helpman, Elhanan & Melitz, Marc, 2004. "Export versus FDI with Heterogeneous Firms," Scholarly Articles 3229098, Harvard University Department of Economics.
  20. Michael P. Keane & Susan E. Feinberg, 2006. "Accounting for the Growth of MNC-Based Trade Using a Structural Model of U.S. MNCs," American Economic Review, American Economic Association, vol. 96(5), pages 1515-1558, December.
  21. Ronald W. Jones, 2000. "Globalization and the Theory of Input Trade," MIT Press Books, The MIT Press, edition 1, volume 1, number 026210086x, June.
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