DP3737 Managerial Incentives and the International Organization of Production

Author(s): Gene M. Grossman, Elhanan Helpman
Publication Date: February 2003
Keyword(s): direct foreign investment, outsourcing, theory of the firm
JEL(s): D23, F23, L22
Programme Areas: International Trade and Regional Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=3737

We develop a model in which heterogeneous firms in an industry choose their modes of organization and the location of their subsidiaries or suppliers. We assume that the principals of a firm are constrained in the nature of the contracts they can write with suppliers or employees. Our main result concerns the sorting of firms with different productivity levels into different organizational forms. We use the model to examine the implications of falling trade costs for the relevant prevalence of outsourcing and foreign direct investment.