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Contract Enforcement, Comparative Advantage and Long-Run Growth

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Author Info
Ottaviano, Gianmarco Ireo Paolo

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Abstract

The effects of the quality of institutions on economic development and comparative advantage have been so far investigated separately. This paper proposes a theoretical framework in which trade patterns and growth rates are jointly determined by international differences in contract enforcement that affect firms' organizational decisions. In a two-country dynamic Ricardian model with endogenous innovation and hold-up problems, the value chain consists of two activities, innovation and production. Entry in the market happens through R&D and entrants face two decisions. The 'location decision' determines where to place R&D laboratories and production plants. Through the 'ownership decision' firms choose whether to perform innovation and production within the same vertically integrated structure or not. In this framework, the quality of contract enforcement drives the ownership decision, which affects R&D returns, research intensity and growth. Balance of payments adjustments cause movements in relative wages, which affect the location decision and, therefore, the pattern of sectoral specialization and international trade.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 6419.

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Date of creation: Aug 2007
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Handle: RePEc:cpr:ceprdp:6419

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Related research
Keywords: economic growth; incomplete contracts; innovation; theory of the firm;

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Find related papers by JEL classification:
D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
F10 - International Economics - - Trade - - - General
L23 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Organization of Production
O30 - Economic Development, Technological Change, and Growth - - Technological Change - - - General
O40 - Economic Development, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General

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  7. Naghavi, Alireza & Ottaviano, Gianmarco Ireo Paolo, 2006. "Outsourcing, Complementary Innovations and Growth," CEPR Discussion Papers 5925, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  14. Martimort, D. & Verdier, T., 1999. "The Internal Organization of the Firm, Transaction Costs and Macroeconomic Growth," DELTA Working Papers 1999-08, DELTA (Ecole normale supérieure).
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  15. Nathan Nunn, 2007. "Relationship-Specificity, Incomplete Contracts, and the Pattern of Trade," The Quarterly Journal of Economics, MIT Press, vol. 122(2), pages 569-600, 05. [Downloadable!] (restricted)
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  16. Daron Acemoglu & Simon Johnson & James A. Robinson, 2002. "Reversal Of Fortune: Geography And Institutions In The Making Of The Modern World Income Distribution," The Quarterly Journal of Economics, MIT Press, vol. 117(4), pages 1231-1294, November. [Downloadable!] (restricted)
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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Alireza Naghavi & Gianmarco I.P. Ottaviano, 2008. "Outsourcing, Complementary Innovations and Growth," Center for Economic Research (RECent) 019, University of Modena and Reggio E., Dept. of Economics. [Downloadable!]
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