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Trade liberalization, outsourcing, and the hold-up problem

Ornelas, Emanuel and Turner, John L. (2008) Trade liberalization, outsourcing, and the hold-up problem. Journal of International Economics, 74 (1). pp. 225-241. ISSN 0022-1996

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Identification Number: 10.1016/j.jinteco.2007.02.005

Abstract

This paper shows that, in a bilateral relationship where a foreign supplier has to make a relationship-specific investment but cannot enforce a complete contract, the standard hold-up problem of underinvestment is aggravated when trade incurs a tariff. In this context, we identify two new channels through which trade liberalization enhances international trade. First, lower tariffs increase the incentives of foreign suppliers to undertake cost-reducing investments. Second, lower tariffs may prompt vertical multinational integration. These indirect effects imply that responses of trade volumes to trade liberalization are greater than standard tradenext term models suggest and help explain current trends toward foreign outsourcing and intra-firm trade.

Item Type: Article
Official URL: http://www.elsevier.com/wps/find/journaldescriptio...
Additional Information: © 2008 Elsevier
Subjects: H Social Sciences > HC Economic History and Conditions
H Social Sciences > HD Industries. Land use. Labor
H Social Sciences > HF Commerce
Sets: Research centres and groups > Managerial Economics and Strategy Group
Departments > Management
Collections > Economists Online
Date Deposited: 13 Jul 2011 13:49
Last Modified: 06 Jun 2012 17:54
URI: http://eprints.lse.ac.uk/id/eprint/37051

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