Trade and Market Thickness: Effects on Organizations

Abstract

Globalization, by raising the number of buyers available to each seller and the number of sellers available to each buyer, raises the thickness, or the effective number of participants, of every market. Market thickness can have subtle effects on incentives and organizations, alleviating hold-up problems, resulting in less vertical integration, more informal contracting, and more cooperative and innovative relationships with subcontractors. However, it can also weaken long-run relationships, distorting relationship-specific investments and risk-sharing. This paper surveys the theory and empirical evidence, indicating when market thickness helps and when it hurts.

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