Subcontracting bargaining power and the trade policy

Ku Chu Tsao, Shih Jye Wu, Jin-Li Hu, Yan Shu Lin*

*Corresponding author for this work

Research output: Contribution to journalArticle

1 Scopus citations

Abstract

In this paper, we consider that the split of surplus from a subcontracting deal depends on the relative bargaining powers of domestic and foreign firms. The finding shows that a domestic optimal export policy is a tax (subsidy) if the bargaining power of the domestic firm is sufficiently small (large). We also demonstrate that a domestic firm’s higher bargaining power increases (may decrease) domestic profit if the export policy is exogenous (endogenous). In the presence of an outsider option, the domestic optimal export policy will be threatened by the outsider option if the domestic firm’s bargaining power is sufficiently small, and thus a large bargaining power increases the optimal export tax. At the same time, the foreign firm may still subcontract to the domestic firm even if the domestic firm has a higher total marginal cost of the intermediate good than the outsider option.

Original languageEnglish
Pages (from-to)82-100
Number of pages19
JournalJournal of International Trade and Economic Development
Volume28
Issue number1
DOIs
StatePublished - 2 Jan 2019

Keywords

  • Bargaining power
  • outsider option
  • subcontracting
  • trade policy

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