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Relationship Specificity, Incomplete Contracts and the Pattern of Trade

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Author Info
Nathan Nunn (University of British Columbia)

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Abstract

When relationship-specific investments are necessary for production, under-investment occurs if contracts cannot be enforced. The efficiency loss from under-investment will differ across industries depending on the importance of relationship-specific investments in the production process. As a consequence, a country's contracting environment may be an important determinant of comparative advantage. To test for this, I construct measures of the efficiency of contract enforcement across countries and the importance of relationship-specific investments across industries. I find that countries with better contract enforcement specialize in industries that rely heavily on relationshipspecific investments. This is true even after controlling for traditional determinants of comparative advantage such as endowments of capital and skilled labor.

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Paper provided by EconWPA in its series International Trade with number 0512018.

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Length: 49 pages
Date of creation: 29 Dec 2005
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Handle: RePEc:wpa:wuwpit:0512018

Note: Type of Document - pdf; pages: 49
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Related research
Keywords: International trade; Comparative advantage; Relationship- specific investments; Contract enforcement.;

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Find related papers by JEL classification:
O - Economic Development, Technological Change, and Growth
P - Economic Systems

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