Incomplete contracts and the impact of globalization on consumer welfare

Arbeitspapier

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 component-intensive 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.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: CESifo Working Paper ; No. 3484

Classification and Topics

• Classification: Wirtschaft ; Multinational Firms; International Business ; Firm Organization and Market Structure ; Real Estate Markets, Spatial Production Analysis, and Firm Location: General
• Subject: consumer welfare ; incomplete contracts ; hold-up problem ; Globalisierung ; Nord-Süd-Beziehungen ; Offshoring ; Unvollständiger Vertrag ; Sunk Costs ; Konsumentenrente ; Wohlfahrtseffekt ; Theorie

Contributors, Location and Time

• Event: Geistige Schöpfung
• (who): Defever, Fabrice
• Event: Veröffentlichung
• (who): Center for Economic Studies and ifo Institute (CESifo)
• (where): Munich
• (when): 2011

Further information

• Handle: http://hdl.handle.net/10419/46332
• Last update: 10.03.2025, 11:43 AM CET