Firms' organizational modes with productivity heterogeneity, demand uncertainty and production capacity

This paper investigates how firms' demand uncertainty with capacity constraints and their productivity heterogeneity affect their making-or-buying organizational choices in a general equilibrium framework with incomplete contracts. It shows that a final-good producer may adopt integrating a part of the production of its intermediate input in-house and outsource it at arm's length domestically or abroad simultaneously. Moreover, Five organizational modes, exiting the market, outsourcing in the North, outsourcing in the South, integrating and outsourcing in the North simultaneously, and integrating in the North and outsourcing in the South simultaneously, in turn occur with increase of firm-level productivity, as well as its demand uncertainty. Influences of uncertainty and productivity on prevalence of various organizational modes are also explored.