Template-Type: ReDIF-Paper 1.0

Author-Name: Bohdan Kukharskyy 
Author-X-Name-First: Bohdan 
Author-X-Name-Last: Kukharskyy


Title: Global Sourcing if Contracts are Reference Points

	
Abstract: This paper presents econometric evidence for a link between a country’s level of egalitarianism and its inward foreign direct investment. In order to provide a theoretical rationale for this relationship, I embed Hart and Moore’s (2008) novel contractual foundation into a simple model of global sourcing with culturally dissimilar countries. Entrepreneurs can cooperate
with foreign suppliers under two contractual modes: rigid and flexible. If suppliers consider original contracts as reference points and future is uncertain, a fundamental tradeoff arises between these two modes. By stipulating a range of possible outcomes, a flexible contract allows for future adaptation but is associated with ex post haggling cost. By specifying a single outcome, a rigid contract eliminates future disagreement but precludes beneficial adjustments to the occurring shocks. The key message of this paper is twofold: Due to lower haggling cost, the degree of contractual flexibility is higher in egalitarian countries. If future is uncertain, these countries are more attractive for international investors than less egalitarian ones.

Length: 41 pages

Creation-Date:  2012-11

File-URL: http://www.bgpe.de/texte/DP/129_Kukharskyy.pdf
File-Format: Application/pdf

File-Function: First version, 2012

Number: 129

Classification-JEL: D03, D23, D63, F23, L23

Keywords: Foreign direct investment, cross-country cultural differences, egalitarianism, risk, contracts as reference points, haggling, contractual rigidity vs. flexibility

Handle: RePEc:bav:wpaper:129_Kukharskyy