James E. Rauch and Joel Watson

"Starting small in an unfamiliar environment"
JEL codes: L24, D83
Keywords: outsourcing, search, technology transfer, uncertainty

Abstract: We design a simple model of a developed country buyer's search for a less developed country supplier and the subsequent relationship between the two parties. Matched firms can "start small" with a trial order to gain information about the ability of the LDC supplier to successfully fill a large order. We show that the propensity for the buyer to start small increases with the cost of search for a new supplier and decreases with the probability that the current or new supplier can fulfill the large order successfully after training. We provide supportive empirical evidence for these and other results.

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