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Trade Liberalization and Organizational Change

  • Paola Conconi

    (Université Libre de Bruxelles, ECARES and CEPR)

  • Patrick Legros

    (Université 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 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, even when firms do not relocate across countries, the price changes triggered by liberalization of product markets can lead to significant organizational restructuring within countries. Second, the removal of barriers to factor mobility can lead to inefficient reorganization and adversely affect consumers. Third, “deep integration” the liberalization of both product and factor markets ­ leads to the convergence of organizational design across countries.

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Paper provided by Centro Studi Luca d'Agliano, University of Milano in its series Development Working Papers with number 262.

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Length: 32
Date of creation: 27 Oct 2008
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Handle: RePEc:csl:devewp:262
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  1. Patrick Legros & Andrew F. Newman, 2007. "Competing for Ownership," Boston University - Department of Economics - Working Papers Series WP2007-003, Boston University - Department of Economics.
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  12. Patrick Legros & Andrew F. Newman, 2013. "A Price Theory of Vertical and Lateral Integration," The Quarterly Journal of Economics, Oxford University Press, vol. 128(2), pages 725-770.
  13. Hart, Oliver D. & Moore, John, 1990. "Property Rights and the Nature of the Firm," Scholarly Articles 3448675, Harvard University Department of Economics.
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  15. Guadalupe, Maria & Wulf, Julie, 2009. "The Flattening Firm and Product Market Competition," CEPR Discussion Papers 7253, C.E.P.R. Discussion Papers.
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  20. Patrick Legros & Andrew F. Newman, 2008. "Competitive Prices and Organizational Choices," Boston University - Department of Economics - The Institute for Economic Development Working Papers Series dp-173, Boston University - Department of Economics.
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  27. Patrick Legros & Andrew F. Newman, 2006. "Managerial Firms, Organizational Choice, and Consumer Welfare," Boston University - Department of Economics - Working Papers Series WP2006-059, Boston University - Department of Economics.
  28. Patrick Legros & Andrew Newman, 1996. "Wealth effects, distribution, and the theory of organization," ULB Institutional Repository 2013/7036, ULB -- Universite Libre de Bruxelles.
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