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Trade Liberalization and Organizational Change

  • Paola Conconi
  • Patrick Legros
  • Andrew Newman

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. Organizational choices also depend on the terms of trade in supplier markets, which affect the division of surplus between managers. We show that, even when firms do not relocate across countries, the price changes triggered by the liberalization of product markets can lead to changes in ownership structures within countries. The removal of barriers to factor mobility can also in- duce widespread restructuring, which can lead to increases in product prices (or declines in quality), hurting consumers worldwide.

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Paper provided by ULB -- Universite Libre de Bruxelles in its series ULB Institutional Repository with number 2013/145500.

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Date of creation: 2012
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Publication status: Published in: Journal of international economics (2012) v.86,p.197-208
Handle: RePEc:ulb:ulbeco:2013/145500
Note: SCOPUS: ar.j
Contact details of provider: Postal: CP135, 50, avenue F.D. Roosevelt, 1050 Bruxelles
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