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Investment in Relationship-Specific Assets: Does Finance Matter?

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Author Info

  • Strieborny, M.
  • Kukenova, M.

    (Tilburg University, Center for Economic Research)

Abstract

An influential strand of literature starting with the Nobel Prize winning work of Oliver Williamson (1971, 1975) argues that a rational agent underinvests in relationship-specific assets due to the possibility of an opportunistic behaviour on the part of her contractual partner. We first combine the insights from this literature with the theoretical work on financial intermediaries and argue that a strong banking sector can alleviate this well-known holdup problem and stimulate relationship-specific investment. Then we empirically confirm this prediction by showing that industries dependent on relationship-specific investment from their suppliers grow disproportionately faster in countries with a high level of financial development and in US states which deregulated their banking sector. Our work establishes a novel channel through which finance a¤ects the real economy. It also complements the literature that has stressed legally binding contracts as a standard solution to the holdup problem.

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Bibliographic Info

Paper provided by Tilburg University, Center for Economic Research in its series Discussion Paper with number 2010-38S.

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Date of creation: 2010
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Handle: RePEc:dgr:kubcen:201038s

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Web page: http://center.uvt.nl

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Keywords: financial development; relationship-specific investment; growth;

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Cited by:
  1. Patrik Tingvall & Andreas Poldahl, 2012. "Determinants of Firm R&D: The Role of Relationship-Specific Interactions for R&D Spillovers," Journal of Industry, Competition and Trade, Springer, vol. 12(4), pages 395-411, December.
  2. Strieborny, Martin, 2013. "Suppliers, Investors, and Equity Market Liberalizations," Knut Wicksell Working Paper Series 2013/13, Knut Wicksell Centre for Financial Studies, Lund University.
  3. Heyman, Fredrik & Gustavsson Tingvall, Patrik, 2012. "The Dynamics of Offshoring and Institutions," Working Paper Series 919, Research Institute of Industrial Economics.

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