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The Impact of Contract Enforcement Costs on Outsourcing and Aggregate Productivity

Johannes Boehm

CEP Discussion Papers from Centre for Economic Performance, LSE

Abstract: Legal institutions affect economic outcomes, but how much? This paper documents how costly supplier contract enforcement shapes firm boundaries, and quantifies the impact of this transaction cost on aggregate productivity and welfare. I embed a contracting game between a buyer and a supplier in a general-equilibrium model. Contract enforcement costs lead suppliers to under produce. Thus, firms will perform more of the production process in-house instead of outsourcing it. On a macroeconomic scale, in countries with slow and costly courts, firms should buy relatively less inputs from sectors whose products are more specific to the buyer-seller relationship. I present reduced-form evidence for this hypothesis using a novel measure of relationship-specificity, which I construct from microdata on US case law. I then structurally estimate my model, and perform welfare counterfactuals. Setting enforcement costs to US levels would increase real income by an average of 7.5 percent across all countries, and by an average of 15.3 percent across low-income countries. Hence, transaction costs and the determinants of firm boundaries are important for countries' aggregate level of development.

Keywords: Contract enforcement costs; contracting frictions; transaction costs; outsourcing; aggregate productivity (search for similar items in EconPapers)
JEL-codes: D23 F11 O43 L22 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-eff
Date: 2015-11
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5) Track citations by RSS feed

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http://cep.lse.ac.uk/pubs/download/dp1382.pdf (application/pdf)

Related works:
Working Paper: The Impact of Contract Enforcement Costs on Outsourcing and Aggregate Productivity (2018) Downloads
Working Paper: The Impact of Contract Enforcement Costs on Outsourcing and Aggregate Productivity (2018) Downloads
Working Paper: The Impact of Contract Enforcement Costs on Outsourcing and Aggregate Productivity (2017) Downloads
Working Paper: The Impact of Contract Enforcement Costs on Outsourcing and Aggregate Productivity (2016) Downloads
Working Paper: The Impact of Contract Enforcement Costs on Outsourcing and Aggregate Productivity (2015) Downloads
Working Paper: The impact of contract enforcement costs onoutsourcing and aggregate productivity (2015) Downloads
Working Paper: The impact of contract enforcement costs on outsourcing and aggregate productivity (2015) Downloads
Working Paper: The Impact of Contract Enforcement Costs on Outsourcing and Aggregate Productivity (2014)
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