Trade Policy and Firm Boundaries

Andrew Newman, Laura Alfaro, Paola Conconi and Harald Fadinger

No WP2011-035, Boston University - Department of Economics - Working Papers Series from Boston University - Department of Economics

Abstract: This paper provides evidence that market conditions matter for organization design by studying how trade policy affects vertical integration. We embed an incomplete-contract model of firm boundaries into an international trade framework. Integration decisions are driven by a tradeoff between managers’ pecuniary benefits of coordinating production and their private benefits of operating in preferred ways. Integration generates more output than non-integration, but imposes a cost on managers by forcing them to accommodate to common procedures. A key implication is that higher product prices result in more integration. Since trade policy affects prices, it influences organizational decisions: higher tariffs lead to more integration; moreover, ownership structures are more alike across countries with similar levels of protection. To assess the evidence, we construct firm-level indices of vertical integration for a large set of countries from a unique dataset. Our empirical analysis, which exploits both cross-section and time-series variation in import tariffs, provides strong support for the predictions of the model.

JEL-codes: D23 F13 (search for similar items in EconPapers)
Pages: 48 pages
Date: 2011-01
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (12)

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Working Paper: Trade Policy and Firm Boundaries (2010)
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