Starting Small in an Unfamiliar Environment

35 Pages Posted: 11 Apr 2011 Last revised: 10 Oct 2022

See all articles by James E. Rauch

James E. Rauch

University of California, San Diego (UCSD) - Department of Economics; National Bureau of Economic Research (NBER)

Joel Watson

University of California, San Diego (UCSD) - Department of Economics

Date Written: March 1999

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, James E. and Watson, Joel, Starting Small in an Unfamiliar Environment (March 1999). NBER Working Paper No. w7053, Available at SSRN: https://ssrn.com/abstract=1806850

James E. Rauch (Contact Author)

University of California, San Diego (UCSD) - Department of Economics ( email )

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Joel Watson

University of California, San Diego (UCSD) - Department of Economics ( email )

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United States
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619-534-7040 (Fax)

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