Essays on outsourcing with imperfect contract enforcement and international trade

Chapter 1 concentrates on the effect of final-goods producers' decisions regarding outsourcing production in an environment of relative economic insecurity and imperfect contract enforcement. The contracting environment in each country is measured by the quality of the respective legal system. We find that in the long run, trade could obviate a poor legal system, by relocating all the final producers in the North. All final producers could be located in the South, but that occurs only when the two countries' legal systems are quite good and similar. It is possible to observe firms producing final goods in both countries, only when their legal systems are either perfectly equivalent, or symmetric.; Chapter 2 explores the effects of international trade on intermediate and final-goods producers' decisions regarding outsourcing production in an environment of imperfect contract enforcement, measured by the quality of the respective legal system in each country. It also traces the influence on wages. The efficiency vs. profitability trade-off has a crucial impact on the location decisions of final producers as in Chapter 1. This paper finds that, in the long run, trade acts as a substitute for a poor legal system, by relocating all final producers in the country with the stricter contract implementation. Wages increase with the improvement of the legal system.; Chapter 3 examines the effect of legal convergence on trade. The underlying hypothesis is that contract enforcement is better when the two countries have more similar (and stricter) legal systems, and it affects trade flows positively. A three-country model is considered, in which if the improvement in the quality of the legal system of one country is biased towards another one, this acts to increase trade between them. It respectively decreases trade with the third. The accession into the EU (or lack thereof) of Central and Eastern European, and Former Soviet Union countries, provides a good "natural" experiment for examining this prediction, as some of them are required to bring their laws into conformity with the European Union law, while others are not. The empirical strategy is to look at East-West trade flows during the period of this legal convergence to assess the effect of biased legal reforms on trade flows. There is convincing empirical evidence in support of the main hypothesis.