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The impact of contract enforcement costs onoutsourcing and aggregate productivity

Boehm, Johannes (2015) The impact of contract enforcement costs onoutsourcing and aggregate productivity. CEP Discussion Paper (1382). Centre for Economic Performance, London School of Economics and Political Science, London, UK.

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Abstract

Legal institutions affect economic outcomes, but how much? This paper documents how costly supplier contract enforcement shapes firm boundaries, and quantifies the impact of this transaction cost on aggregate productivity and welfare. I embed a contracting game between a buyer and a supplier in a general-equilibrium model. Contract enforcement costs lead suppliers to under produce. Thus, firms will perform more of the production process in-house instead of outsourcing it. On a macroeconomic scale, in countries with slow and costly courts, firms should buy relatively less inputs from sectors whose products are more specific to the buyer-seller relationship. I present reduced-form evidence for this hypothesis using a novel measure of relationship-specificity, which I construct from microdata on US case law. I then structurally estimate my model, and perform welfare counterfactuals. Setting enforcement costs to US levels would increase real income by an average of 7.5 percent across all countries, and by an average of 15.3 percent across low-income countries. Hence, transaction costs and the determinants of firm boundaries are important for countries' aggregate level of development.

Item Type: Monograph (Discussion Paper)
Official URL: http://cep.lse.ac.uk/
Additional Information: © 2015 The Authors
Divisions: Centre for Economic Performance
Subjects: H Social Sciences > HB Economic Theory
JEL classification: D - Microeconomics > D2 - Production and Organizations > D23 - Organizational Behavior; Transaction Costs; Property Rights
F - International Economics > F1 - Trade > F11 - Neoclassical Models of Trade
L - Industrial Organization > L2 - Firm Objectives, Organization, and Behavior > L22 - Firm Organization and Market Structure: Markets vs. Hierarchies; Vertical Integration; Conglomerates; Subsidiaries
O - Economic Development, Technological Change, and Growth > O4 - Economic Growth and Aggregate Productivity
Sets: Research centres and groups > Centre for Economic Performance (CEP)
Date Deposited: 14 Jan 2016 15:32
Last Modified: 20 Feb 2019 03:55
Funders: Economic and Social Research Council
URI: http://eprints.lse.ac.uk/id/eprint/64997

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