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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


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:
Additional Information: © 2008 Elsevier
Divisions: Management
Subjects: H Social Sciences > HC Economic History and Conditions
H Social Sciences > HD Industries. Land use. Labor
H Social Sciences > HF Commerce
JEL classification: D - Microeconomics > D2 - Production and Organizations > D23 - Organizational Behavior; Transaction Costs; Property Rights
F - International Economics > F1 - Trade > F13 - Commercial Policy; Protection; Promotion; Trade Negotiations; International Trade Organizations
F - International Economics > F2 - International Factor Movements and International Business > F23 - Multinational Firms; International Business
L - Industrial Organization > L2 - Firm Objectives, Organization, and Behavior > L22 - Firm Organization and Market Structure: Markets vs. Hierarchies; Vertical Integration; Conglomerates; Subsidiaries
Date Deposited: 13 Jul 2011 13:49
Last Modified: 20 Sep 2021 00:48

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