Trilateral Trade And Asset Allocation - Extending The Grossman-Hart-Moore Model

This paper extends the Grossman-Hart-Moore model to suite a specific trilateral trade transaction. In this transaction a downstream producer produces the final good using inputs from two different upstream suppliers. Moreover one of the upstream supplier needs an input from the other upstream supplier for its production. The optimal way to organize this transaction depend on the characteristics of assets, human capital and investments. The general finding is that it is more demanding to find a unique Pareto optimal organization in the trilateral model than in the bilateral Grossman-Hart-Moore model. This paper also produces a number of other potentially useful results.