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Contractual Frictions and Global Sourcing

  • Pol Antras
  • Elhanan Helpman

We generalize the Antras 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. Nunn, Nathan, 2007. "Relationship-Specificity, Incomplete Contracts, and the Pattern of Trade," Scholarly Articles 4686801, Harvard University Department of Economics.
  2. 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.
  3. Andrew B. Bernard & Jonathan Eaton & J. Bradford Jensen & Samuel Kortum, 2003. "Plants and Productivity in International Trade," American Economic Review, American Economic Association, vol. 93(4), pages 1268-1290, September.
  4. Marc J. Melitz, 2003. "The Impact of Trade on Intra-Industry Reallocations and Aggregate Industry Productivity," Econometrica, Econometric Society, vol. 71(6), pages 1695-1725, November.
  5. 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.
  6. repec:hrv:faseco:4784029 is not listed on IDEAS
  7. Grossman, Sanford J & Hart, Oliver, 1985. "The Cost and Benefits of Ownership: A Theory of Vertical and Lateral Integration," CEPR Discussion Papers 70, C.E.P.R. Discussion Papers.
  8. Elhanan Helpman & Marc J. Melitz & Stephen R. Yeaple, 2003. "Export versus FDI," NBER Working Papers 9439, National Bureau of Economic Research, Inc.
  9. Hart, Oliver D. & Moore, John, 1990. "Property Rights and the Nature of the Firm," Scholarly Articles 3448675, Harvard University Department of Economics.
  10. Antras, Pol & Helpman, Elhanan, 2004. "Global Sourcing," Scholarly Articles 3196327, Harvard University Department of Economics.
  11. Elhanan Helpman, 2006. "Trade, FDI, and the Organization of Firms," NBER Working Papers 12091, National Bureau of Economic Research, Inc.
  12. Pol Antras, 2004. "Incomplete Contracts and the Product Cycle," 2004 Meeting Papers 19, Society for Economic Dynamics.
  13. repec:rus:hseeco:122439 is not listed on IDEAS
  14. Elhanan Helpman & Marc J. Melitz & Stephen R. Yeaple, 2004. "Export Versus FDI with Heterogeneous Firms," American Economic Review, American Economic Association, vol. 94(1), pages 300-316, March.
  15. Jose Manuel 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.
  16. Andrew B. Bernard & J. Bradford Jensen, 1997. "Exceptional Exporter Performance: Cause, Effect, or Both?," NBER Working Papers 6272, National Bureau of Economic Research, Inc.
  17. Ronald W. Jones, 2000. "Globalization and the Theory of Input Trade," MIT Press Books, The MIT Press, edition 1, volume 1, number 026210086x, March.
  18. Pol Antràs, 2003. "Firms, Contracts, and Trade Structure," NBER Working Papers 9740, National Bureau of Economic Research, Inc.
  19. Daron Acemoglu & Pol Antràs & Elhanan Helpman, 2007. "Contracts and Technology Adoption," American Economic Review, American Economic Association, vol. 97(3), pages 916-943, June.
  20. Feenstra, Robert C & Hanson, Gordon H, 1996. "Globalization, Outsourcing, and Wage Inequality," American Economic Review, American Economic Association, vol. 86(2), pages 240-45, May.
  21. 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.
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