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The Impact of Contract Enforcement Costs on Outsourcing and Aggregate Productivity

Author

Listed:
  • Johannes Boehm

    (London School of Economics)

Abstract

Legal institutions affect economic outcomes, but how much? This paper documents how costly supplier contract enforcement shapes firm boundaries, and quantifies the impact of this transaction cost on aggregate productivity and welfare. I embed a contracting game between a buyer and a supplier in a general-equilibrium macro-model. Contract enforcement costs lead suppliers to underproduce. Thus, firms will perform more of the production process in-house instead of outsourcing it. On a macroeconomic scale, in countries with slow and costly courts, firms should buy relatively less inputs from sectors whose products are more specific to the buyer-seller relationship. I first present reduced-form evidence for this hypothesis using cross-country regressions. I use microdata on case law from the United States to construct a new measure of relationship-specificity by sector-pairs. This allows me to control for productivity differences across countries and sectors and to causally identify the effect of contracting frictions on industry structure. I then proceed to structurally estimate the key parameters of my macro-model. Using a set of counterfactual experiments, I investigate the role of contracting frictions in shaping productivity and income per capita across countries. Setting enforcement costs to US levels (alternative: zero) would increase real income by an average of 3.6 percent (7 percent) across all countries, and by an average of 10 percent (13.3 percent) across low-income countries. Hence, transaction costs and firm boundaries are important on a macroeconomic scale.

Suggested Citation

  • Johannes Boehm, 2014. "The Impact of Contract Enforcement Costs on Outsourcing and Aggregate Productivity," 2014 Meeting Papers 340, Society for Economic Dynamics.
    • Handle: RePEc:red:sed014:340
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    Cited by:

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    2. Lorenzo Caliendo & Fernando Parro & Aleh Tsyvinski, 2017. "Distortions and the Structure of the World Economy," NBER Working Papers 23332, National Bureau of Economic Research, Inc.
    3. Sultan Mehmood, 2020. "Judicial Independence and Development: Evidence from Pakistan," Working Papers halshs-03054106, HAL.
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    7. Johannes Boehm & Ezra Oberfield, 2020. "Misallocation in the Market for Inputs: Enforcement and the Organization of Production," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 135(4), pages 2007-2058.
    8. Toshihiko Mukoyama & Latchezar Popov, 2020. "Industrialization and the evolution of enforcement institutions," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 69(3), pages 745-788, April.
    9. Harald Fadinger & Christian Ghiglino & Mariya Teteryatnikova, 2015. "Income Differences and Input-Output Structure," Vienna Economics Papers vie1510, University of Vienna, Department of Economics.
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    12. Sultan Mehmood, 2020. "Judicial Independence and Development: Evidence from Pakistan," AMSE Working Papers 2041, Aix-Marseille School of Economics, France.
    13. Phillip Keefer & Carlos Scartascini, 2022. "Organization, Citizenship, and the Social Contract," IDB Publications (Book Chapters), in: Phillip Keefer & Carlos Scartascini (ed.), Trust: The Key to Social Cohesion and Growth in Latin America and the Caribbean, edition 1, chapter 8, pages 195-222, Inter-American Development Bank.
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    15. Eppinger, Peter & Kukharskyy, Bohdan, 2021. "Contracting institutions and firm integration around the world," European Economic Review, Elsevier, vol. 137(C).
    16. Dominick Bartelme & Yuriy Gorodnichenko, 2015. "Linkages and Economic Development," NBER Working Papers 21251, National Bureau of Economic Research, Inc.
    17. Grobovšek Jan, 2018. "Development accounting with intermediate goods," The B.E. Journal of Macroeconomics, De Gruyter, vol. 18(1), pages 1-27, January.
    18. Fadinger, Harald & Ghiglino, Christian & Teteryatnikova, Mariya, 2015. "Income differences and input-output structure," Working Papers 15-11, University of Mannheim, Department of Economics.
    19. Jan Grobovšek, 2020. "Managerial Delegation, Law Enforcement, and Aggregate Productivity," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 87(5), pages 2256-2289.
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    23. Toshiyuki Matsuura & Banri Ito & Eiichi Tomiura, 2023. "Intrafirm trade, input–output linkage, and contractual frictions: evidence from Japanese affiliate-level data," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 159(1), pages 133-152, February.
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    More about this item

    JEL classification:

    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • F11 - International Economics - - Trade - - - Neoclassical Models of Trade
    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure
    • O4 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity

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