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Product quality, incomplete contract and the product cycle

Author

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  • He, Huanlang
  • Yu, Zhihao

Abstract

According to the traditional theory of product cycle, firms in the North usually produce goods by themselves when the goods are relatively new, but later move production to the South after they become mature. But why do some firms choose intrafirm production transfer before arm's length transfer, while others choose to skip the stage of intrafirm transfer and go straight to arm's length transfer? By introducing product quality into the incomplete-contract framework of the product cycle, we show that more capable firms choose high-quality intermediate inputs, produce high-quality products, and choose intrafirm transfer before arm's length. Conversely, less capable firms choose the latter in the product cycle.

Suggested Citation

  • He, Huanlang & Yu, Zhihao, 2018. "Product quality, incomplete contract and the product cycle," International Review of Economics & Finance, Elsevier, vol. 53(C), pages 160-167.
  • Handle: RePEc:eee:reveco:v:53:y:2018:i:c:p:160-167
    DOI: 10.1016/j.iref.2017.10.003
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    References listed on IDEAS

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    Cited by:

    1. Bastos, Paulo & Silva, Joana, 2010. "The quality of a firm's exports: Where you export to matters," Journal of International Economics, Elsevier, vol. 82(2), pages 99-111, November.
    2. Ho, Calvin K. & McAuley, Kimberley B. & Peppley, Brant A., 2019. "Biolubricants through renewable hydrocarbons: A perspective for new opportunities," Renewable and Sustainable Energy Reviews, Elsevier, vol. 113(C), pages 1-1.

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    More about this item

    Keywords

    Product cycle; Product quality; Incomplete contract; Firm boundaries; Outsourcing;
    All these keywords.

    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure
    • L33 - Industrial Organization - - Nonprofit Organizations and Public Enterprise - - - Comparison of Public and Private Enterprise and Nonprofit Institutions; Privatization; Contracting Out

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