Quality of Institutions and Outsourcing

ABSTRACT

This paper explores the effects of international trade and contracting on intermediate and final-goods producers’ decisions regarding outsourcing of production in an environment of imperfect contract enforcement, measured by the quality of the respective legal system in each country. The efficiency versus profitability trade-off has a crucial impact on the location decisions of intermediate producers. Improving the quality of the legal system will increase the volume of outsourcing in the country with imperfect contract enforcement.