Incomplete Contracts and the Product Cycle
American Economic Review · 2005 · Volume 95 · Issue 4
Abstract
I present a model in which the incomplete nature of contracts governing international transactions limits the extent to which the production process can be fragmented across borders. Because of contractual frictions, goods are initially manufactured in the same country where product development takes place. Only when the good becomes sufficiently standardized is the manufacturing stage of production shifted to a low-wage foreign location. Solving for the optimal organizational structure, I develop a new version of the product cycle hypothesis in which manufacturing is shifted abroad first within firm boundaries, and only at a later stage to independent foreign firms.
Keywords
Organizational Behavior, Transaction Costs, Property Rights, Models of Trade with Imperfect Competition and Scale Economies, Fragmentation, Multinational Firms, International Business, Firm Organization and Market Structure, Contracting Out, Joint Ventures, Technology Licensing
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