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Are Inventories a Buffer Against Weak Legal Systems?

  • Angara V. Raja
  • Hans-Bernd Schaefer

Weak legal enforcement of contracts leads to inefficient breach and an overall increase in breaches for firms and individuals. We suggest that firms use inventory holdings as a means to counteract weak contract enforcement. We test the hypothesis that firms operating in weak legal environments have a higher ratio of inventories to net sales than firms operating in strong legal environments. Empirical evidence in support of the hypothesis using data from over three hundred comparable firms from fourteen product groups across thirty-nine countries is presented. Copyright 2007 Blackwell Publishing Ltd..

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Article provided by Wiley Blackwell in its journal Kyklos.

Volume (Year): 60 (2007)
Issue (Month): 3 (08)
Pages: 415-439

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Handle: RePEc:bla:kyklos:v:60:y:2007:i:3:p:415-439
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  1. Martin Brown & Armin Falk & Ernst Fehr, 2004. "Relational Contracts and the Nature of Market Interactions," Econometrica, Econometric Society, vol. 72(3), pages 747-780, 05.
  2. Bental, B. & Eden, B., 1992. "Inventories in a Competitive Environment," Working Papers 92-19, University of Iowa, Department of Economics.
  3. George Baker & Robert Gibbons & Kevin J. Murphy, 2002. "Relational Contracts And The Theory Of The Firm," The Quarterly Journal of Economics, MIT Press, vol. 117(1), pages 39-84, February.
  4. Kahn, James A, 1987. "Inventories and the Volatility of Production," American Economic Review, American Economic Association, vol. 77(4), pages 667-79, September.
  5. Scheinkman, Jose A & Schechtman, Jack, 1983. "A Simple Competitive Model with Production and Storage," Review of Economic Studies, Wiley Blackwell, vol. 50(3), pages 427-41, July.
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