Starting Small in an Unfamiliar Environment

James Rauch and Joel Watson

No 1218, Cowles Foundation Discussion Papers from Cowles Foundation for Research in Economics, Yale University

Abstract: Motivated by a characteristic way in which firms in developed countries make their decisions regarding cooperation with potential partners from less developed countries, we design a simple model of a DC firm's search for an LDC partner/supplier and the subsequent relationship between the two parties. Matched firms can "start small" with a trial order or pilot project of variable size in order to gain information about the ability of the LDC firm to successfully carry out a large project. We derive results relating whether and how the parties start small to the characteristics of the large project and to the matching environment. Among other results, we show how risk and search cost are associated with the propensity to start small and we establish a connection between starting small and the expected longevity of successful partnerships. We also address methods of contract enforcement and demonstrate the relationship between starting small and monitoring.

Pages: 35 pages
Date: 1999-05
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Citations: View citations in EconPapers (4)

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Related works:
Journal Article: Starting small in an unfamiliar environment (2003)
Working Paper: Starting Small in an Unfamiliar Environment (1999)
Working Paper: Starting Small in an Unfamiliar Environment (1999)
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