Relationship-Specificity, Incomplete Contracts and the Pattern of Trade

Citation:

Nunn N. Relationship-Specificity, Incomplete Contracts and the Pattern of Trade. Quarterly Journal of Economics. 2007; 122 (2) : 569-600.
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Abstract:

Is a country’s ability to enforce contracts an important determinant of comparative advantage? To answer this question, I construct a variable that measures, for each good, the proportion of its intermediate inputs that require relationship-specific investments. Combining this measure with data on trade flows and judicial quality, I find that countries with good contract enforcement specialize in the production of goods for which relationship-specific investments are most important. According to my estimates contract enforcement explains more of the pattern of trade than physical capital and skilled labor combined.

Notes:

Reprinted in D. Bernhofen (ed.), Empirical International Trade, Edward Elgar Publishing, 2010.

Last updated on 09/29/2018