International Trade and Organizations.

• Position: National Bureau of Economic Research Working Group meeting on May 3 2003

The NBER's Working Group on International Trade and Organizations met in Cambridge on May 3. Gordon Hanson, NBER and University of California, San Diego, organized the meeting. These papers were discussed:

Patrick Legros, Princeton Universiry, and Andrew E Newman, University College, London, "Competing for Ownership"

Pol Antras, NBER and MIT, "Incomplete Contracts and the Product Cycle"

Tahir Andrabi, Pomona College; Maitreesh Ghatak, London School of Economics; and Asim Ijaz Khwaja, Harvard University, "Subcontractors for Tractors: Theory and Evidence on Flexible Specialization, Supplier Selection, and Contracting"

Dalia Marin, University of Munich, and Thierry Verdier, DELTA, Paris, "Globalization and the Empowerment of Talent"

Legros and Newman show that vertical integration may be chosen by managers to the detriment of consumers, even in the absence of monopoly power in either supply or product markets. This effect is most likely to occur when demand is initially high and there is a negative supply shock, or when demand is low and there is a positive demand shock. Therefore, there is a need for scrutiny of vertical mergers even in the absence of market power. This result is robust to the introduction of active shareholders who may oppose the merger and to other extensions.

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 contracts leads to the emergence of product cycles. Goods initially are manufactured in the North, where product development takes place. As the good matures and becomes more standardized, manufacturing shifts to the South, benefiting from lower wages. Following the property-rights approach to the theory of the firm, the same force that creates product cycles--that is, incomplete contracts--opens the door to a parallel analysis of the determinants of the mode of organization. As a result, a new version of the product cycle emerges, in which manufacturing shifts to the South first within firm boundaries, and only later to independent firms in the South. Relative to a world with only arm's length transacting, allowing for...