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Trade Liberalization and Organizational Change

Author

Listed:
  • 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)

Abstract

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.

Suggested Citation

  • Paola Conconi & Patrick Legros & Andrew F. Newman, 2008. "Trade Liberalization and Organizational Change," Development Working Papers 262, Centro Studi Luca d'Agliano, University of Milano.
  • Handle: RePEc:csl:devewp:262
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    File URL: https://www.dagliano.unimi.it/media/wp2008_262.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    Firms; Contracts; Globalization;
    All these keywords.

    JEL classification:

    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business

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