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CEP discussion paper
Protection and International Sourcing
Emanuel Ornelas and John L. Turner
December 2008
Paper No' CEPDP0900:
Full Paper (pdf)

JEL Classification: F13; L23; D23

Tags: international trade; tariffs; hold-up problem; sourcing; organizational form

We study the impact of import protection on relationship-specific investments, organizational choice and welfare. We show that a tariff on intermediate inputs can improve social welfare through mitigating hold-up problems. It does so if it discriminates in favor of the investing party, thereby improving its bargaining position. On the other hand, a tariff can prompt inefficient organizational choices if it discriminates in favor of less productive firms or if integration costs are low. Protection distorts organizational choices because tariff revenue, which is external to the firms, drives a wedge between the private and social gains to offshoring and integration.