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Starting Small in an Unfamiliar Environment

  • James E. Rauch

    (UCLA, San Diego & NBER)

  • Joel Watson

    (Dept. Economics, UCLA, San Diego)

Motivated by a characteristic way in which firms in developed countries make their decisions regarding cooperation with potential partners from less developed countries, we design a simple model of a DC firm's search for an LDC partner/supplier and the subsequent relationship between the two parties. Matched firms can "start small" with a trial order or pilot project of variable size in order to gain information about the ability of the LDC firm to successfully carry out a large project. We derive results relating whether and how the parties start small to the characteristics of the large project and to the matching environment. Among other results, we show how risk and search cost are associated with the propensity to start small and we establish a connection between starting small and the expected longevity of successful partnerships. We also address methods of contract enforcement and demonstrate the relationship between starting small and monitoring.

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File URL: http://cowles.econ.yale.edu/P/cd/d12a/d1218.pdf
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Paper provided by Cowles Foundation for Research in Economics, Yale University in its series Cowles Foundation Discussion Papers with number 1218.

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Length: 35 pages
Date of creation: May 1999
Date of revision:
Handle: RePEc:cwl:cwldpp:1218
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  13. Saikat Datta, 1996. "Building Trust," STICERD - Theoretical Economics Paper Series /1996/305, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE.
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  23. Jovanovic, Boyan, 1979. "Job Matching and the Theory of Turnover," Journal of Political Economy, University of Chicago Press, vol. 87(5), pages 972-90, October.
  24. Joel Watson, 1999. "Starting Small and Commitment," Cowles Foundation Discussion Papers 1217, Cowles Foundation for Research in Economics, Yale University.
  25. Patrick Bolton & Christopher Harris, 1999. "Strategic Experimentation," Econometrica, Econometric Society, vol. 67(2), pages 349-374, March.
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