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  3. American Economic Review
  4. September 2005
  5. Incomplete Contracts and the Product Cycle

Incomplete Contracts and the Product Cycle

  • Pol Antràs
American Economic Review
vol. 95, no. 4, September 2005
(pp. 1054-1073)
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Abstract

I present a model in which the incomplete nature of contracts governing international transactions limits the extent to which the production process can be fragmented across borders. Because of contractual frictions, goods are initially manufactured in the same country where product development takes place. Only when the good becomes sufficiently standardized is the manufacturing stage of production shifted to a low-wage foreign location. Solving for the optimal organizational structure, I develop a new version of the product cycle hypothesis in which manufacturing is shifted abroad first within firm boundaries, and only at a later stage to independent foreign firms.

Citation

Antràs, Pol. 2005. "Incomplete Contracts and the Product Cycle." American Economic Review, 95 (4): 1054-1073. DOI: 10.1257/0002828054825600

JEL Classification

  • D23 Organizational Behavior; Transaction Costs; Property Rights
  • F12 Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
  • F23 Multinational Firms; International Business
  • L22 Firm Organization and Market Structure
  • L24 Contracting Out; Joint Ventures; Technology Licensing