TY  - JOUR
AU  - Rauch,James E.
AU  - Watson,Joel
TI  - Starting Small in an Unfamiliar Environment
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 7053
PY  - 1999
Y2  - March 1999
UR  - http://www.nber.org/papers/w7053
L1  - http://www.nber.org/papers/w7053.pdf
N1  - Author contact info:
James E. Rauch
Department of Economics
University of California, San Diego
La Jolla, CA 92093-0508
Tel: 858/534-2405
Fax: 858/534-7040
E-Mail: jrauch@weber.ucsd.edu

Joel Watson
UC, San Diego
Department of Economics, 0508
9500 Gillman Drive
La Jolla, CA 92093-0508
E-Mail: jwatson@ucsd.edu
AB  - 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.
ER  -