Incomplete contracts and the impact of globalization on consumer welfare

Defever, Fabrice (2011) Incomplete contracts and the impact of globalization on consumer welfare. CEP Discussion Papers (CEPDP1057). London School of Economics and Political Science. Centre for Economic Performance, London, UK.

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Abstract

We embed a North-South trade model into an incomplete contracts setting where the production of heterogeneous firms can be geographically separated. When a Northern headquarter contracts with a Southern supplier instead of a Northern supplier, the presence of international incomplete contracts may lead to a higher price. As a result, trade liberalization, that induces offshoring, is not necessarily welfare-enhancing for consumers, despite the lower cost of labor in the South. In addition, firms which use the supplier's component intensively, offshore their supplier in the South using outsourcing. As trade costs fall, less componentintensive firms also offshore, but by vertically integrating their supplier. We argue that this organizational change increases production-shifting in the South, implying that a larger number of varieties will be produced in the South where contracts are incomplete. We show that, this may reduce consumer welfare in both countries.

Item Type:	Monograph (Discussion Paper)
Official URL:	https://cep.lse.ac.uk/_new/publications/discussion...
Additional Information:	© 2011 The Author(s)
Divisions:	LSE
Subjects:	H Social Sciences > HC Economic History and Conditions H Social Sciences > HF Commerce
JEL classification:	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 R - Urban, Rural, and Regional Economics > R3 - Production Analysis and Firm Location
Date Deposited:	21 Feb 2024 14:00
Last Modified:	11 Dec 2024 19:52
URI:	http://eprints.lse.ac.uk/id/eprint/121914

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