Globalisation, Vertical Linkages, and ‘Relational Contracts‘

This paper analyses the consequences of trade liberalisation on firms’ internal organisation, with formal and informal arrangements. I extend the ’relational contract’ approach of Baker, Gibbons, and Murphy (2002) in an open economy set-up. I find that freer trade in final goods increases the quasi-rents from suppliers’ specific investments, leading to an increase in outsourcing. When trade liberalisation focuses more on final goods than on intermediates, a reduction in specific suppliers’ opportunism implies a rise in the use of ’relational contracts’ between firms. This concurs with an observed rise of hybrid organisational arrangements. I also derive testable implications on productivity dispersion, price-cost margins, and demand elasticities. JEL-Classification: F23, L22, F12 Key-words: Outsourcing, Trade Liberalisation, Relational Contracts, Organisational choice, Hybrid Organisations, Fragmentation ∗[email protected] Phone: (+33)143136337. Fax: (+33)143136310. Postal mail: 48 bd Jourdan 75014 Paris, France. I gratefully acknowledge many helpful comments and suggestions from Thierry Verdier, as well as Facundo Albornoz, Michaël Bégorre Bret, Francesco Bripi, Hector Calvo, Fabrice Defever, and Yannick Kalantzis. I also thank seminar participants at PSE and the University of Geneva. †Joint research unit CNRS-EHESS-ENPC-ENS