IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this paper or follow this series

Incomplete Contracts and the Product Cycle

  • Pol Antràs

The incomplete nature of contracts governing international transactions limits the extent to which the production process can be fragmented across borders. In a dynamic, general-equilibrium Ricardian model of North-South trade, the incompleteness of international contracts is shown to lead to the emergence of product cycles. Because of contractual frictions, goods are initially manufactured in the North, where product development takes place. As the good matures and becomes more standardized, the manufacturing stage of production is shifted to the South to benefit from lower wages. Following the property-rights approach to the theory of the firm, the same force that creates product cycles, i.e., incomplete contracts, opens the door to a parallel analysis of the determinants of the mode of organization. The model gives rise to a new version of the product cycle in which manufacturing is shifted to the South first within firm boundaries, and only at a later stage to independent firms in the South. Relative to a world with only arm's length transacting, allowing for intrafirm production transfer by multinational firms is shown to accelerate the shift of production towards the South, while having an ambiguous effect on relative wages. The model delivers macroeconomic implications that complement the work of Krugman (1979), as well as microeconomic implications consistent with the findings of the empirical literature on the product cycle.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://www.nber.org/papers/w9945.pdf
Download Restriction: no

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 9945.

as
in new window

Length:
Date of creation: Sep 2003
Date of revision:
Publication status: published as Pol Antr�s, 2005. "Incomplete Contracts and the Product Cycle," American Economic Review, American Economic Association, vol. 95(4), pages 1054-1073, September.
Handle: RePEc:nbr:nberwo:9945
Note: ITI
Contact details of provider: Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
Phone: 617-868-3900
Web page: http://www.nber.org
Email:


More information through EDIRC

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as in new window
  1. Nöldeke, Georg & Schmidt, Klaus M., 1995. "Option contracts and renegotiation: A solution to the Hold-Up Problem," Munich Reprints in Economics 19329, University of Munich, Department of Economics.
  2. Jocelyn Glass, Amy & Saggi, Kamal, 2002. "Licensing versus direct investment: implications for economic growth," Journal of International Economics, Elsevier, vol. 56(1), pages 131-153, January.
  3. Che, Y.K. & Hausch, D.B., 1997. "Cooperative Investments and the Value of Contracting," Working papers 9714, Wisconsin Madison - Social Systems.
  4. Pol Antràs, 2003. "Firms, Contracts, and Trade Structure," NBER Working Papers 9740, National Bureau of Economic Research, Inc.
  5. Ethier, W.J. & Markusen, J.R., 1993. "Multinational Firms, Technology Diffusion and Trade," ISER Discussion Paper 0303, Institute of Social and Economic Research, Osaka University.
  6. Antràs, Pol & Helpman, Elhanan, 2004. "Global Sourcing," CEPR Discussion Papers 4170, C.E.P.R. Discussion Papers.
  7. Wilson, Robert W, 1977. "The Effect of Technological Environment and Product Rivalry on R&D Effort and Licensing of Inventions," The Review of Economics and Statistics, MIT Press, vol. 59(2), pages 171-78, May.
  8. Gene M. Grossman & Elhanan Helpman, 1989. "Quality Ladders and Product Cycles," NBER Working Papers 3201, National Bureau of Economic Research, Inc.
  9. Mansfield, Edwin & Romeo, Anthony, 1980. "Technology Transfer to Overseas Subsidiaries by U.S.-Based Firms," The Quarterly Journal of Economics, MIT Press, vol. 95(4), pages 737-50, December.
  10. Stephen Knack & Philip Keefer, 1995. "Institutions And Economic Performance: Cross-Country Tests Using Alternative Institutional Measures," Economics and Politics, Wiley Blackwell, vol. 7(3), pages 207-227, November.
  11. Helpman, Elhanan, 1984. "A Simple Theory of International Trade with Multinational Corporations," Journal of Political Economy, University of Chicago Press, vol. 92(3), pages 451-71, June.
  12. Theodore H. Moran, 2001. "Parental Supervision: The New Paradigm for Foreign Direct Investment and Development," Peterson Institute Press: All Books, Peterson Institute for International Economics, number pa64, May.
  13. Krugman, Paul, 1979. "A Model of Innovation, Technology Transfer, and the World Distribution of Income," Journal of Political Economy, University of Chicago Press, vol. 87(2), pages 253-66, April.
  14. Robert Feenstra, 2003. "Integration Of Trade And Disintegration Of Production In The Global Economy," Working Papers 986, University of California, Davis, Department of Economics.
  15. Robert E. Hall & Charles I. Jones, 1999. "Why Do Some Countries Produce So Much More Output per Worker than Others?," NBER Working Papers 6564, National Bureau of Economic Research, Inc.
  16. Farok J Contractor, 1984. "Choosing Between Direct Investment and Licensing: Theoretical Considerations and Empirical Tests," Journal of International Business Studies, Palgrave Macmillan, vol. 15(3), pages 167-188, September.
  17. Aghion, Philippe & Dewatripont, Mathias & Rey, Patrick, 1994. "Renegotiation Design with Unverifiable Information," Scholarly Articles 12375014, Harvard University Department of Economics.
  18. Hart, Oliver & Moore, John, 1990. "Property Rights and the Nature of the Firm," Journal of Political Economy, University of Chicago Press, vol. 98(6), pages 1119-58, December.
  19. Davidson, W H & McFetridge, Donald G, 1984. "International Technology Transactions and the Theory of the Firm," Journal of Industrial Economics, Wiley Blackwell, vol. 32(3), pages 253-64, March.
  20. Grossman, G.M. & Helpman, E., 1989. "Endogemour Product Cycles," Papers 10-89, Tel Aviv.
  21. Markusen, James R., 1984. "Multinationals, multi-plant economies, and the gains from trade," Journal of International Economics, Elsevier, vol. 16(3-4), pages 205-226, May.
  22. Grossman, G.M. & Helpman, E., 2001. "Integration vs. Outsourcing in Industry Equilibrium," Papers 2001-7, Tel Aviv.
  23. Pol Antr�s, 2005. "Incomplete Contracts and the Product Cycle," American Economic Review, American Economic Association, vol. 95(4), pages 1054-1073, September.
  24. W H Davidson & Donald G McFetridge, 1985. "Key Characteristics in the Choice of International Technology Transfer Mode," Journal of International Business Studies, Palgrave Macmillan, vol. 16(2), pages 5-21, June.
  25. Daron Acemoglu & Simon Johnson & James A. Robinson, 2001. "The Colonial Origins of Comparative Development: An Empirical Investigation," American Economic Review, American Economic Association, vol. 91(5), pages 1369-1401, December.
  26. Robert C. Feenstra, . "Facts And Fallacies About Foreign Direct Investment," Department of Economics 98-04, California Davis - Department of Economics.
  27. repec:hrv:faseco:4784029 is not listed on IDEAS
  28. Grossman, Sanford J & Hart, Oliver D, 1986. "The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration," Journal of Political Economy, University of Chicago Press, vol. 94(4), pages 691-719, August.
  29. Ethier, Wilfred J, 1986. "The Multinational Firm," The Quarterly Journal of Economics, MIT Press, vol. 101(4), pages 805-33, November.
  30. John McLaren, 2000. ""Globalization" and Vertical Structure," American Economic Review, American Economic Association, vol. 90(5), pages 1239-1254, December.
  31. Elhanan Helpman, 1992. "Innovation, Imitation, and Intellectual Property Rights," NBER Working Papers 4081, National Bureau of Economic Research, Inc.
  32. Aghion, P. & Dewatripont, M. & Rey, P., 1990. "On renegotiation design," European Economic Review, Elsevier, vol. 34(2-3), pages 322-329, May.
  33. Wells, Louis T, Jr, 1969. "Test of a Product Cycle Model of International Trade: U.S. Exports of Consumer Durables," The Quarterly Journal of Economics, MIT Press, vol. 83(1), pages 152-62, February.
  34. Grossman, G.M. & Helpman, E., 1989. "Endogenous Prduct Cycles," Papers 144, Princeton, Woodrow Wilson School - Public and International Affairs.
  35. Jensen, Richard & Thursby, Marie, 1987. "A Decision Theoretic Model of Innovation, Technology Transfer, and Trade," Review of Economic Studies, Wiley Blackwell, vol. 54(4), pages 631-47, October.
  36. Dornbusch, Rudiger & Fischer, Stanley & Samuelson, Paul A, 1977. "Comparative Advantage, Trade, and Payments in a Ricardian Model with a Continuum of Goods," American Economic Review, American Economic Association, vol. 67(5), pages 823-39, December.
  37. Mauro, Paolo, 1995. "Corruption and Growth," The Quarterly Journal of Economics, MIT Press, vol. 110(3), pages 681-712, August.
  38. Bruce Kogut & Udo Zander, 1993. "Knowledge of the Firm and the Evolutionary Theory of the Multinational Corporation," Journal of International Business Studies, Palgrave Macmillan, vol. 24(4), pages 625-645, December.
  39. Vernon, Raymond, 1979. "The Product Cycle Hypothesis in a New International Environment," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 41(4), pages 255-67, November.
  40. Lai, Edwin L. -C., 1998. "International intellectual property rights protection and the rate of product innovation," Journal of Development Economics, Elsevier, vol. 55(1), pages 133-153, February.
  41. Mansfield, Edwin & Romeo, Anthony & Wagner, Samuel, 1979. "Foreign Trade and U.S. Research and Development," The Review of Economics and Statistics, MIT Press, vol. 61(1), pages 49-57, February.
  42. Segerstrom, Paul S & Anant, T C A & Dinopoulos, Elias, 1990. "A Schumpeterian Model of the Product Life Cycle," American Economic Review, American Economic Association, vol. 80(5), pages 1077-91, December.
  43. James R. Markusen, 1995. "The Boundaries of Multinational Enterprises and the Theory of International Trade," Journal of Economic Perspectives, American Economic Association, vol. 9(2), pages 169-189, Spring.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:9945. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ()

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.