Trade Liberalization and Organizational Change

Paola Conconi (), Patrick Legros and Andrew F. Newman

No 7028, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We embed a simple incomplete-contracts model of organization design in a standard two-country perfectly-competitive trade model to examine how the liberalization of product and factor markets affects the ownership structure of firms. In our model, managers decide whether or not to integrate their firms, trading off the pecuniary benefits of coordinating production decisions with the private benefits of operating in their preferred ways. The price of output is a crucial determinant of this choice, since it affects the size of the pecuniary benefits. In particular, non-integration is chosen at "low" and "high" prices, while integration occurs at moderate prices. Organizational choices also depend on the terms of trade in supplier markets, which affect the division of surplus between managers. We obtain three main results. First, even when firms do not relocate across countries, the price changes triggered by liberalization of product markets can lead to significant organizational restructuring within countries. Second, the removal of barriers to factor mobility can lead to inefficient reorganization and adversely affect consumers. Third, "deep integration" - the liberalization of both product and factor markets - leads to the convergence of organizational design across countries.

Keywords: Contracts; Firms; Globalization (search for similar items in EconPapers)
JEL-codes: D23 F13 F23 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-bec and nep-int
Date: 2008-10
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Working Paper: Trade Liberalization and Organizational Change (2008)
Working Paper: Trade Liberalization and Organizational Change (2008)
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