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Take the Goods and Run: Contracting Frictions and Market Power in Supply Chains

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  • Felipe Brugués

Abstract

This paper studies the efficiency of self-enforced relational agreements, a common solution to contracting frictions, when sellers have market power and contracts cannot be externally enforced. To this end, I develop a dynamic contracting model with limited enforcement in which buyers can default on their trade credit debt and estimate it using a novel dataset from the Ecuadorian manufacturing supply chain. The key empirical finding is that bilateral trade is inefficiently low in early periods of the relationship, but converges toward efficiency over time, despite sellers' market power. Counterfactual simulations imply that both market power and enforcement contribute to inefficiencies in trade.

Suggested Citation

  • Felipe Brugués, 2026. "Take the Goods and Run: Contracting Frictions and Market Power in Supply Chains," American Economic Review, American Economic Association, vol. 116(2), pages 582-626, February.
    • Handle: RePEc:aea:aecrev:v:116:y:2026:i:2:p:582-626
    DOI: 10.1257/aer.20230264
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    More about this item

    JEL classification:

    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • K12 - Law and Economics - - Basic Areas of Law - - - Contract Law
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
    • L60 - Industrial Organization - - Industry Studies: Manufacturing - - - General
    • O14 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Industrialization; Manufacturing and Service Industries; Choice of Technology

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