 Quality of Institutions, Global Sourcing, and the Make-or-Buy DecisionBohdan Kukharskyy No 128, Working Papers from Bavarian Graduate Program in Economics (BGPE) Abstract: Do contractual institutions and a country’s level of trust interact in their impact on the international make-or-buy decision? By analyzing explicit and implicit contracting in a unified framework, I show that better formal contractibility may both facilitate and hinder relational contracting on a trust basis. If formal agreements crowd out first-best efficient relational contracts, firms’ profitability and consumers’ welfare decrease. In contrast, a higher level of trust unambiguously increases firm performance and a country’s attractiveness as an offshoring destination. I also show that improvements in the trust level are associated with largest reductions in intrafirm trade if formal contractibility is low. Lastly, this paper argues that models built on the simplifying assumption of ex ante lump-sum transfers between parties generally overestimate the prevalence of outsourcing vs. integration. Keywords: International organization of production; institutional quality; relational contracting; interaction of explicit and implicit contracts; welfare (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:bav:wpaper:128_kukharskyy Access Statistics for this paper More papers in Working Papers from Bavarian Graduate Program in Economics (BGPE) Contact information at EDIRC. |
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