Ornelas, Emanuel and Turner, John L. (2008) Protection and international sourcing. CEP Discussion Paper, No. 900. Centre for Economic Performance, London School of Economics and Political Science, London, UK. ISBN 9780853283331
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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 party, thereby improving its bargaining position. On the other hand, a tariff can prompt inefficient organizational choices if it discriminates in favor of less productive firms 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.
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