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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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File URL: http://www.dagliano.unimi.it/media/wp2008_262.pdf
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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
Date of revision:
Handle: RePEc:csl:devewp:262
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  1. Eric Van den Steen, 2005. "Organizational Beliefs and Managerial Vision," Journal of Law, Economics and Organization, Oxford University Press, vol. 21(1), pages 256-283, April.
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  8. Legros, Patrick & Newman, Andrew, 2009. "A Price Theory of Vertical and Lateral Integration," CEPR Discussion Papers 7211, C.E.P.R. Discussion Papers.
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  13. Patrick Legros & Andrew F. Newman, 2007. "Competing for Ownership," Boston University - Department of Economics - Working Papers Series WP2007-003, Boston University - Department of Economics.
  14. Diego Puga & Daniel Trefler, 2009. "Wake up and smell the ginseng: International trade and the rise of incremental innovation in low-wage countries," Working Papers 2009-01, Instituto Madrileño de Estudios Avanzados (IMDEA) Ciencias Sociales.
  15. Mussa, Michael, 1974. "Tariffs and the Distribution of Income: The Importance of Factor Specificity, Substitutability, and Intensity in the Short and Long Run," Journal of Political Economy, University of Chicago Press, vol. 82(6), pages 1191-1203, Nov.-Dec..
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  19. Maria Guadalupe & Julie Wulf, 2010. "The Flattening Firm and Product Market Competition: The Effect of Trade Liberalization on Corporate Hierarchies," American Economic Journal: Applied Economics, American Economic Association, vol. 2(4), pages 105-27, October.
  20. Emanuel Ornelas & John L. Turner, 2008. "Protection and international sourcing," LSE Research Online Documents on Economics 28511, London School of Economics and Political Science, LSE Library.
  21. 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.
  22. Andrew F. Newman & Laura Alfaro & Paola Conconi & Harald Fadinger, 2011. "Trade Policy and Firm Boundaries," Boston University - Department of Economics - Working Papers Series WP2011-035, Boston University - Department of Economics.
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  28. James A. Schmitz Jr., 2005. "What Determines Productivity? Lessons from the Dramatic Recovery of the U.S. and Canadian Iron Ore Industries Following Their Early 1980s Crisis," Journal of Political Economy, University of Chicago Press, vol. 113(3), pages 582-625, June.
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