Incomplete Contracts and the Product Cycle

By Pol Antràs. 2005

197 citations recorded by the source corpus.

The incomplete nature of contracts governing international transactions limits the extent to which the production process can be fragmented across borders. In a dynamic, general-equilibrium Ricardian model of North-South trade, the incompleteness of international contracts is shown to lead to the emergence of product cycles. Because of contractual frictions, goods are initially manufactured in the North, where product development takes place. As the good matures and becomes more standardized, the manufacturing stage of production is shifted to the South to benefit from lower wages. Following the property-rights approach to the theory of the firm, the same force that creates product cycles, i.e., incomplete contracts, opens the door to a parallel analysis of the determinants of the mode of organization. The model gives rise to a new version of the product cycle in which manufacturing is shifted to the South first within firm boundaries, and only at a later stage to independent firms in the South. Relative to a world with only arm's length transacting, allowing for intrafirm production transfer by multinational firms is shown to accelerate the shift of production towards the South, while having an ambiguous effect on relative wages. The model delivers macroeconomic implications that complement the work of Krugman (1979), as well as microeconomic implications consistent with the findings of the empirical literature on the product cycle.

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Citations in the corpus

Do Tariffs Matter for the Extensive Margin of International Trade? An Empirical Analysis (2010, background): “28 See conditions (4)-(9).”
Relationship Specificity, Incomplete Contracts and the Pattern of Trade (2007, methodology): “…2005; Puga and Trefler 2005], more recent studies also consider the effect that contract enforcement can have on comparative advantage [Levchenko 2004; Antràs 2005; Acemoglu, Antràs, and Helpman 2005; Costinot 2005].2 To see exactly how contract enforcement can affect comparative advantage,…”
An Elementary Theory of Global Supply Chains (2011, unknown): “The previous comparative static results are reminiscent of Vernon s (1966) product cycle hypothesis; see also Grossman and Helpman (1991) and Antràs (2005).”
Functional fragmentation and the location of multinational firms in the enlarged Europe (2006, background): “Head et al. (1995) have also considered the previous location of multinational firms as an im6 For example, in an incomplete contract framework, Antràs (2005) consider that headquarters input can not be relocated in the South because of the weak protection of property rights in low-wage countries.”
Offshoring and Directed Technical Change (2015, unknown): “…a variety of contractual imperfections, for example by assuming that the offshoring firm is subject to a hold up problem forcing it to transfer part of its profits to a partner company in the East (e.g., Antràs, 2005) or has only imperfect IPR protection.21 Let Vh be the value of a high-skill firm.”