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Relationship-Specificity, Incomplete Contracts, and the Pattern of Trade

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  • Nathan Nunn

Abstract

Is a country's ability to enforce contracts an important determinant of comparative advantage? To answer this question, I construct a variable that measures, for each good, the proportion of its intermediate inputs that require relationship-specific investments. Combining this measure with data on trade flows and judicial quality, I find that countries with good contract enforcement specialize in the production of goods for which relationship-specific investments are most important. According to my estimates contract enforcement explains more of the pattern of trade than physical capital and skilled labor combined.

Suggested Citation

  • Nathan Nunn, 2007. "Relationship-Specificity, Incomplete Contracts, and the Pattern of Trade," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 122(2), pages 569-600.
    • Handle: RePEc:oup:qjecon:v:122:y:2007:i:2:p:569-600.
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    File URL: http://hdl.handle.net/10.1162/qjec.122.2.569
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    JEL classification:

    • O - Economic Development, Innovation, Technological Change, and Growth
    • P - Political Economy and Comparative Economic Systems

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