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A dynamic model with vertical specialization, credit chains, and incomplete enforcement

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  • Karsten Jeske
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    Abstract

    This paper sets up a model to account for differences in total factor productivity due to differences in enforcement of contracts. Vertical specialization generates the need for intra-period credit, because final goods producers cannot pay their intermediate goods suppliers before they produce their final good. The paper shows that if there are enforcement problems, the capital distribution is skewed in the sense that intermediate goods producers operate at lower capital levels and higher marginal products of capital than final goods producers. This wedge is created by the price for intermediate goods, which is lower in economies with bad enforcement. For this reason, the high-productivity firms in the intermediate goods sector have no incentive to grow and the low-productivity firms in the final goods sector, benefiting from low intermediate goods prices, have no incentive to shrink, which causes productivity to be lower in countries with bad enforcement.

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    File URL: http://www.frbatlanta.org/filelegacydocs/wp0221.pdf
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    Bibliographic Info

    Paper provided by Federal Reserve Bank of Atlanta in its series Working Paper with number 2002-21.

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    Date of creation: 2002
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    Handle: RePEc:fip:fedawp:2002-21

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    Related research

    Keywords: Productivity ; Contracts ; Econometric models;

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    1. Mark Gertler & Simon Gilchrist, 1993. "Monetary policy, business cycles and the behavior of small manufacturing firms," Finance and Economics Discussion Series 93-4, Board of Governors of the Federal Reserve System (U.S.).
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