Institutional quality and changing organization of international production networks

We construct a general contract model with continuous institutional quality from 0 to 1, which extend the normal GHM model by embedding institutional quality (reversible level of investment) into Nash bargaining and defining the residual claim rights as the control right over the assert produced by relational specific investment. Combining this model into Helpman — Krugman trade theory, we then assess the changing mechanism of trade to FDI and outsourcing under intra-product specialization. We find that: i) the scope and modes of international production are determined by tradeoff between transaction cost and producing cost under specific technology level. ii) Other things equal, the improvement of institutional quality in south will extend the scope of international production (especial in FDI modes) and upgrade the relative technology level of production there. iii) The relative technology progress in south will induce international intra-product specialization and production transfer, and changes the FDI mode into outsourcing.