Starting Small in an Unfamiliar Environment
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.
Rauch, James and Watson, Joel, "Starting Small in an Unfamiliar Environment" (1999). Cowles Foundation Discussion Papers. 1466.