Working Paper: CEPR ID: DP3737
Authors: Gene Grossman; Elhanan Helpman
Abstract: We develop a model in which heterogeneous firms in an industry choose their modes of organization and the location of their subsidiaries or suppliers. We assume that the principals of a firm are constrained in the nature of the contracts they can write with suppliers or employees. Our main result concerns the sorting of firms with different productivity levels into different organizational forms. We use the model to examine the implications of falling trade costs for the relevant prevalence of outsourcing and foreign direct investment.
Keywords: Direct Foreign Investment; Outsourcing; Theory of the Firm
JEL Codes: D23; F23; L22
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Firm Productivity (D21) | Outsourcing (L24) |
| Firm Productivity (D21) | Vertical Integration (L22) |
| Improved Monitoring (E63) | Market Shares for Multinational Corporations (F23) |
| Improved Monitoring (E63) | Market Shares of Independent Suppliers (L81) |
| Trade Liberalization (F13) | Prevalence of Outsourcing (L24) |
| Trade Liberalization (F13) | Prevalence of FDI (F23) |
| Improvements in Transportation (R42) | Prevalence of Outsourcing (L24) |
| Improvements in Transportation (R42) | Prevalence of FDI (F23) |