- Contractual Frictions and Global Sourcing
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- by Helpman, Elhanan; Antràs, Pol
- We generalize the Antràs and Helpman (2004) model of the international organization of
production in order to accommodate varying degrees of contractual frictions. In particular, we
allow the degree of contractibility to vary across inputs and countries. A continuum of firms
with heterogeneous productivities decide whether to integrate or outsource the production of
intermediate inputs, and from which country to source them. Final-good producers and their
suppliers make relationship-specific investments which are only partially contractible, both in
an integrated firm and in an arm’s-length relationship. We describe equilibria in which firms
with different productivity levels choose different ownership structures and supplier locations,
and then study the effects of changes in the quality of contractual institutions on the relative
prevalence of these organizational forms. Better contracting institutions in the South raise the
prevalence of offshoring, but may reduce the relative prevalence of FDI or foreign outsourcing.
The impact on the composition of offshoring depends on whether the institutional improvement
affects disproportionately the contractibility of a particular input. A key message of the paper
is that improvements in the contractibility of inputs controlled by final-good producers have
different effects than improvements in the contractibility of inputs controlled by suppliers.
- Publication Type: WCFIA Working Paper
- Published Date: November 22, 2006
- Field of Interest: International Economics
- Helpman, Elhanan, and Pol Antràs. "Contractual Frictions and Global Sourcing." Working Paper 2008-0046, Weatherhead Center for International Affairs, Harvard University, November 2006.