Trade policy and firm boundaries
By: Laura Alfaro, Paola Conconi, Harald Fadinger, Andrew F. Newman
Contributors: Conconi, Paola; Fadinger, Harald; Newman, Andrew F.; Harvard Business School
Edition: 2nd rev.
Series: Working paper / Harvard Business School -- 10-060; Working paper (Harvard Business School) -- 10-060
Publisher: Harvard Business School
Published: 2011
Place of publication: Boston]
Language: eng
Number of pages: 47
Description: This paper provides evidence that market conditions matter for organization design by studying how trade policy affects vertical integration. We embed an incomplete-contract model of firm boundaries into an international trade framework. Integration decisions are driven by a tradeoff between managers' pecuniary benefits of coordinating production and their private benefits of operating in preferred ways. Integration generates more output than non-integration, but imposes a cost on managers by forcing them to accommodate to common procedures. A key implication is that higher product prices result in more integration. Since trade policy affects prices, it influences organizational decisions: higher tariffs lead to more integration; moreover, ownership structures are more alike across countries with similar levels of protection. To assess the evidence, we construct firm-level indices of vertical integration for a large set of countries from a unique dataset. Our empirical analysis, which exploits both cross-section and time-series variation in import tariffs, provides strong support for the predictions of the model.
Notes: "June 2010, revised February 2011, August 2011" -- Publisher's website.

Includes bibliographical references.