Working Paper: CEPR ID: DP8070
Authors: Emanuel Ornelas; John L Turner
Abstract: We study the impact of import protection on relationship-specific investments, organizational choice and welfare. We show that a tariff on intermediate inputs can improve social welfare through mitigating hold-up problems. It does so if it discriminates in favor of the investing parties, which the tariff achieves by making trade with outsiders more costly. On the other hand, a tariff can prompt inefficient organizational choices if it discriminates in favor of less productive domestic suppliers or if integration costs are low. Protection distorts organizational choices because tariff revenue, which is external to the firms, drives a wedge between the private and social gains to offshoring and integration. Since contract incompleteness affects investment and production decisions differently depending on the organization form, the intensity of this externality varies with organization form. Hence, protection mitigates domestic hold-up problems but inefficiently curbs offshoring. This suggests a role for moderate protection of inputs trade for firms outsourcing domestically, if the protection is coupled with incentives for offshoring activities.
Keywords: international trade; tariffs; holdup problem; sourcing; organizational form
JEL Codes: F13; L22; L23; D23
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Tariffs on intermediate inputs (F16) | Increased investment (E22) |
| Increased investment (E22) | Enhanced social welfare (D69) |
| Tariffs on intermediate inputs (F16) | Enhanced social welfare (D69) |
| Tariffs (F19) | Distorted organizational choices (D71) |
| Tariffs (F19) | Favoring less productive domestic suppliers (F14) |
| Tariffs (F19) | Inefficient organizational choices (D23) |