Contracts and Technology Adoption

We develop a tractable framework for the analysis of the relationship between contractual incompleteness, technological complementarities, and technology adoption. In our model a …rm chooses its technology and investment levels in contractible activities by suppliers of intermediate inputs. Suppliers then choose investments in noncontractible activities, anticipating payo¤s from an ex post bargaining game. We show that greater contractual incompleteness leads to the adoption of less advanced technologies and that the impact of contractual incompleteness is more pronounced when there is greater complementary among the intermediate inputs. We study a number of applications of the main framework and show that the mechanism proposed in the paper can generate sizable productivity di¤erences across countries with di¤erent contracting institutions and that di¤erences in contracting institutions lead to endogenous comparative advantage di¤erences. Keywords: comparative advantage, economic growth, incomplete contracts, technology choice, theory of the …rm. JEL Classi…cation: D23, F10, L23, O30. A previous version of this paper was circulated under the title “Contracts and the Division of Labor.” We thank Gene Grossman, Oliver Hart, Kalina Manova, Damián Migueles, Giacomo Ponzetto, Richard Rogerson, Rani Spiegler, two anonymous referees, and participants in the Canadian Institute for Advanced Research and Minnesota Workshop in Macroeconomic Theory conferences, and seminar participants at Harvard, MIT, Tel Aviv, Universitat Pompeu Fabra, Houston, UCSD, Southern Methodist, Stockholm School of Economics, Stockholm University (IIES), ECARES, Colorado-Boulder, Kellogg, NYU, UBC, Georgetown, World Bank, Montreal, Brandeis, Wisconsin, UC Berkeley, Haifa, Syracuse, and Autònoma-Barcelona for useful comments. We also thank Davin Chor, Alexandre Debs and Ran Melamed for excellent research assistance. Acemoglu and Helpman thank the National Science Foundation for …nancial support. Much of Helpman’s work for this paper was done when he was Sackler Visiting Professor at Tel Aviv University.