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Starting Small in an Unfamiliar Environment

Author

Listed:
  • Rauch, J E
  • Watson, Joel
Abstract
Motivated by a characteristic way in which firms in developed countries make their decisions regarding cooperation with potential partners from less developed countries, we design a simple model of a DC firm's search for an LDC partner/supplier and the subsequent relationship between the two parties. Matched firms can "start small" with a trial order or pilot project of variable size in order to gain information about the ability of the LDC firm to successfully carry out a large project. We derive results relating whether and how the parties start small to the characteristics of the large project and to the matching environment. Among other results, we show how risk and search cost are associated with the propensity to start small and we establish a connection between starting small and the expected longevity of successful partnerships. We also address methods of contract enforcement and demonstrate the relationship between starting small and monitoring.

Suggested Citation

  • Rauch, J E & Watson, Joel, 1999. "Starting Small in an Unfamiliar Environment," University of California at San Diego, Economics Working Paper Series qt4rp145hc, Department of Economics, UC San Diego.
    • Handle: RePEc:cdl:ucsdec:qt4rp145hc
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    risk; uncertainty;

    JEL classification:

    • D20 - Microeconomics - - Production and Organizations - - - General
    • F10 - International Economics - - Trade - - - General

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