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Contracting institutions and product quality

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  • Essaji, Azim
  • Fujiwara, Kinya

Abstract

For many goods, quality improvements involve the use of more sophisticated, higher quality inputs. The production of these sophisticated inputs requires greater collaboration between suppliers and final good producers, with suppliers developing relationship-specific inputs, and final good producers customizing their production processes to incorporate them. In countries with poor legal institutions, the relationship-specific investments needed to achieve strong collaboration, and by extension more sophisticated inputs and higher quality outputs, will arguably be hard to achieve. As the incomplete contracts literature suggests, doubts over contract enforcement will render the return on relationship-specific investments less certain, rendering both suppliers and final good producers less willing to undertake the customization necessary to improve quality. Employing a difference-in-difference methodology on highly disaggregated US import data , this paper studies the impact of legal institutions on product quality. It finds that poor contracting institutions substantially impede a country’s ability to produce high quality final goods: in industries where the potential use of customizable inputs is extensive, countries with weaker contract enforcement regimes produce lower quality final goods.

Suggested Citation

  • Essaji, Azim & Fujiwara, Kinya, 2012. "Contracting institutions and product quality," Journal of Comparative Economics, Elsevier, vol. 40(2), pages 269-278.
  • Handle: RePEc:eee:jcecon:v:40:y:2012:i:2:p:269-278
    DOI: 10.1016/j.jce.2011.07.005
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    References listed on IDEAS

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    Cited by:

    1. Nunn, Nathan & Trefler, Daniel, 2014. "Domestic Institutions as a Source of Comparative Advantage," Handbook of International Economics, Elsevier.
    2. Seitz, Michael & Watzinger, Martin, 2017. "Contract enforcement and R&D investment," Research Policy, Elsevier, vol. 46(1), pages 182-195.
    3. Fałkowski, Jan & Curzi, Daniele & Olper, Alessandro, 2016. "Contract (in)completeness, product quality and trade – evidence from the food industry," 2016 Fifth AIEAA Congress, June 16-17, 2016, Bologna, Italy 242321, Italian Association of Agricultural and Applied Economics (AIEAA).
    4. Donatella Baiardi & Carluccio Bianchi & Eleonora Lorenzini, 2014. "Food competition in world markets: Some evidence from a panel data analysis of top exporting countries," DEM Working Papers Series 083, University of Pavia, Department of Economics and Management.
    5. González, Felipe & Miguel, Edward, 2015. "War and local collective action in Sierra Leone: A comment on the use of coefficient stability approaches," Journal of Public Economics, Elsevier, vol. 128(C), pages 30-33.

    More about this item

    Keywords

    Product quality; International trade; Contract enforcement; Relationship-specific investments;

    JEL classification:

    • F14 - International Economics - - Trade - - - Empirical Studies of Trade
    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements
    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development

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