Publication Type
Working Paper
Version
publishedVersion
Publication Date
7-2025
Abstract
How much do contracting frictions between global firms and their suppliers impact country welfare and trade? We answer this by developing a model of global sourcing under partial contractibility, where firm-supplier relationships are exposed to a bilateral holdup problem. Sourcing decisions aggregate into a gravity equation for trade flows by organizational mode (intrafirm vs. arm’s length), which we take to structural estimation. We can then evaluate welfare changes with an extended Arkolakis, Costinot and Rodriguez-Clare (2012) formula that incorporates these contracting frictions. Our counterfactual analysis reveals a sizeable average country welfare gain of 9.2% from eliminating contracting frictions in global sourcing. We further show how accounting for these frictions significantly reshapes quantitative assessments of the welfare gains from trade, including the stakes in a US-China decoupling scenario.
Discipline
International Economics | Operations and Supply Chain Management
Research Areas
International Economics
First Page
1
Last Page
99
Identifier
10.3386/w34044
Publisher
NBER
City or Country
Cambridge, MA
Citation
CHOR, Davin and MA, Lin.
The Aggregate Welfare and Trade Implications of Contracting Frictions in Global Sourcing. (2025). 1-99.
Available at: https://ink.library.smu.edu.sg/soe_research/2872
Copyright Owner and License
Authors
Creative Commons License
This work is licensed under a Creative Commons Attribution-NonCommercial-No Derivative Works 4.0 International License.
Additional URL
https://doi.org/10.3386/w34044