Working Paper: NBER ID: w9403
Authors: Gene M. Grossman; Elhanan Helpman
Abstract: We develop a model in which the 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: managerial incentives; international organization of production; outsourcing; foreign direct investment
JEL Codes: L22; F23; D23
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| trade costs (F19) | organizational decisions (L20) |
| potential revenues (H27) | choice of organizational form (L39) |
| location of parts division (L23) | potential revenues (H27) |
| monitoring capabilities (E63) | market share for multinational corporations (F23) |
| monitoring capabilities (E63) | market shares for independent suppliers (L81) |