Effects of Adverse Selection on a Multinational Firm’s Decision on where to Subcontract
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This paper analyses the effects of adverse selection on a multinational firm’s decision on where to subcontract. Adverse selection arises since subcontractor firms have more information than the multinational concerning their production costs. The results obtained show that adverse selection confers to subcontractor firms an advantage in their relationship with the multinational, inducing the multinational to subcontract in more than one country. In this way, adverse selection modelling outcomes justify, and are coherent with, the empirical evidence such as, the diversity of countries that multinational firms subcontract and the fast production relocation between countries.
Keywordsinternational subcontracting adverse selection location
JEL ClassificationD82 F23 L24
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