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Global sourcing under uncertainty
Author(s) -
Gervais Antoine
Publication year - 2021
Publication title -
canadian journal of economics/revue canadienne d'économique
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.773
H-Index - 69
eISSN - 1540-5982
pISSN - 0008-4085
DOI - 10.1111/caje.12516
Subject(s) - diversification (marketing strategy) , economics , trade barrier , incentive , international trade , general equilibrium theory , international economics , economies of scale , free trade , welfare , comparative advantage , gains from trade , industrial organization , microeconomics , business , market economy , marketing
This paper develops a general equilibrium model of international trade in homogenous intermediate inputs. In the model, trade between countries is driven exclusively by uncertainty in the delivery of inputs. Because their managers are risk‐averse, final good firms contract with multiple suppliers located in different countries in an attempt to decrease the variability of their profits. The analysis shows that risk diversification provides an incentive for international trade over and above such reasons as comparative advantages (emphasized in classical models of international trade) and economies of scale (emphasized in new trade models) and highlights a new channel—a reduction in uncertainty—through which trade liberalization increases welfare.