Incomplete contracts and the impact of globalization on consumer welfare

Fabrice Defever

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: We embed a North-South trade model into an incomplete contracts setting where the production of heterogeneous firms can be geographically separated. When a Northern headquarter contracts with a Southern supplier instead of a Northern supplier, the presence of international incomplete contracts may lead to a higher price. As a result, trade liberalization, that induces offshoring, is not necessarily welfare-enhancing for consumers, despite the lower cost of labor in the South. In addition, firms which use the supplier's component intensively, offshore their supplier in the South using outsourcing. As trade costs fall, less componentintensive firms also offshore, but by vertically integrating their supplier. We argue that this organizational change increases production-shifting in the South, implying that a larger number of varieties will be produced in the South where contracts are incomplete. We show that, this may reduce consumer welfare in both countries.

Keywords: consumer welfare; incomplete contracts; hold-up problem (search for similar items in EconPapers)
JEL-codes: F23 L22 R3 (search for similar items in EconPapers)
Pages: 29 pages
Date: 2011-07-01
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http://eprints.lse.ac.uk/121914/ Open access version. (application/pdf)

Related works:
Working Paper: Incomplete Contracts and the Impact of Globalization on Consumer Welfare (2011)
Working Paper: Incomplete Contracts and the Impact of Globalization on Consumer Welfare (2011)
Working Paper: Incomplete Contracts and the Impact of Globalization on Consumer Welfare (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:121914

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