Abstract

http://ssrn.com/abstract=882559
 
 

References (31)



 
 

Citations (10)



 


 



Trade Liberalization, Outsourcing, and the Hold-Up Problem


Emanuel Ornelas


London School of Economics & Political Science (LSE) - Department of Management; London School of Economics & Political Science (LSE) - Centre for Economic Performance (CEP)

John L. Turner


University of Georgia - C. Herman and Mary Virginia Terry College of Business - Department of Economics

November 2005


Abstract:     
In a bilateral relationship where the supplier of an intermediate good has to make a relationship-specific investment but cannot write or enforce a complete contract, the standard hold-up problem of underinvestment arises. We show that this problem is aggravated when the buyer is located in a different country and that country has a tariff on imports of the intermediate good. In that context, trade liberalization enhances international trade through three distinct mechanisms: it directly reduces the cost of imported intermediate goods, it induces foreign suppliers to increase cost-reducing investments, and it may prompt the formation of vertical multinational firms. The extra investment increases the value of international bilateral relationships and amplifies the impact of lower tariffs on trade flows. The possible formation of vertical multilateral firms further increases investment and trade. These indirect effects of trade liberalization help explain why standard trade models fail to explain the observed large responses of trade volumes to small tariff reductions and rationalize current trends toward increased foreign outsourcing and intra-firm trade.

Number of Pages in PDF File: 24

Keywords: Trade Liberalization, Outsourcing, Hold-Up Problem

JEL Classification: F13, F23, L22, D23

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Date posted: February 21, 2006  

Suggested Citation

Ornelas, Emanuel and Turner, John L., Trade Liberalization, Outsourcing, and the Hold-Up Problem (November 2005). Available at SSRN: http://ssrn.com/abstract=882559 or http://dx.doi.org/10.2139/ssrn.882559

Contact Information

Emanuel Ornelas (Contact Author)
London School of Economics & Political Science (LSE) - Department of Management ( email )
United Kingdom
London School of Economics & Political Science (LSE) - Centre for Economic Performance (CEP) ( email )
Houghton Street
London WC2A 2AE
United Kingdom
John L. Turner
University of Georgia - C. Herman and Mary Virginia Terry College of Business - Department of Economics ( email )
Athens, GA 30602-6254
United States
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