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The Impact of Contract Enforcement Costs on Outsourcing and Aggregate Productivity

Author

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  • Johannes Boehm

    (London School of Economics)

Abstract

Legal institutions affect economic outcomes, but how much? This paper documents how costly supplier contract enforcement shapes firm boundaries, and quantifies the impact of this transaction cost on aggregate productivity and welfare. I embed a contracting game between a buyer and a supplier in a general-equilibrium macro-model. Contract enforcement costs lead suppliers to underproduce. Thus, firms will perform more of the production process in-house instead of outsourcing it. On a macroeconomic scale, in countries with slow and costly courts, firms should buy relatively less inputs from sectors whose products are more specific to the buyer-seller relationship. I first present reduced-form evidence for this hypothesis using cross-country regressions. I use microdata on case law from the United States to construct a new measure of relationship-specificity by sector-pairs. This allows me to control for productivity differences across countries and sectors and to causally identify the effect of contracting frictions on industry structure. I then proceed to structurally estimate the key parameters of my macro-model. Using a set of counterfactual experiments, I investigate the role of contracting frictions in shaping productivity and income per capita across countries. Setting enforcement costs to US levels (alternative: zero) would increase real income by an average of 3.6 percent (7 percent) across all countries, and by an average of 10 percent (13.3 percent) across low-income countries. Hence, transaction costs and firm boundaries are important on a macroeconomic scale.

Suggested Citation

  • Johannes Boehm, 2014. "The Impact of Contract Enforcement Costs on Outsourcing and Aggregate Productivity," 2014 Meeting Papers 340, Society for Economic Dynamics.
  • Handle: RePEc:red:sed014:340
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    References listed on IDEAS

    as
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    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Christopher Hansman & Jonas Hjort & Gianmarco León & Matthieu Teachout, 2017. "Vertical Integration, Supplier Behavior, and Quality Upgrading among Exporters," NBER Working Papers 23949, National Bureau of Economic Research, Inc.
    2. Jan Grobovsek, 2016. "Managerial Delegation, Law Enforcement, and Aggregate Productivity," ESE Discussion Papers 271, Edinburgh School of Economics, University of Edinburgh.
    3. Harald Fadinger & Christian Ghiglino & Mariya Teteryatnikova, 2015. "Productivity, Networks and Input-Output Structure," 2015 Meeting Papers 624, Society for Economic Dynamics.
    4. Hémous, David & Olsen, Morten, 2015. "Long-term Relationships: Static Gains and Dynamic Inefficiencies," CEPR Discussion Papers 10490, C.E.P.R. Discussion Papers.
    5. Harald Fadinger & Christian Ghiglino & Mariya Teteryatnikova, 2015. "Income Differences and Input-Output Structure," Vienna Economics Papers 1510, University of Vienna, Department of Economics.
    6. Jan Grobovšek, 2011. "Development Accounting with Intermediate Goods," Working Papers 2011.85, Fondazione Eni Enrico Mattei.
    7. Lorenzo Caliendo & Fernando Parro & Aleh Tsyvinski, 2017. "Distortions and the Structure of the World Economy," NBER Working Papers 23332, National Bureau of Economic Research, Inc.
    8. repec:bpj:bejmac:v:18:y:2018:i:1:p:27:n:11 is not listed on IDEAS
    9. Dominick Bartelme & Yuriy Gorodnichenko, 2015. "Linkages and Economic Development," NBER Working Papers 21251, National Bureau of Economic Research, Inc.

    More about this item

    JEL classification:

    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • F11 - International Economics - - Trade - - - Neoclassical Models of Trade
    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure
    • O4 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity

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