Contract (in)completeness, product quality and trade – evidence from the food industry

As the recent contributions to the literature show, institutional differences are an important source of comparative advantage. Yet our understanding of the exact mechanisms through which institutions affect trade flows is still rather limited. In this paper, focusing on food sector, we examine a particular channel through which this effect may occur. Using detailed country-product data, we focus on the relationship between the quality of contracting institutions and product quality, which is commonly perceived as a key feature of how countries specialise in production. In line with the existing theoretical arguments, we find that product quality improvements, which can proxy for an adoption of more advanced technologies, are associated with products made in countries-industries characterised by less contractual incompleteness and characterised by greater initial level of technological complementarities between intermediate inputs.