Are Inventories A Buffer Against Weak Legal Systems?
Weak enforcement of contracts leads to inefficient breach of contract and to an overall increase of contract breaches for firms and individuals. Existing literature on contract enforcement has focussed on self-enforcing contracts and contracts within a relationship, family or clan. At the firm level the focus is on ownership structures and vertical integration. Here, 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. We present a conceptual model and empirical evidence in support of the hypothesis using data from over three hundred firms from fourteen product groups across thirty nine countries.
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- Kahn, James A, 1987. "Inventories and the Volatility of Production," American Economic Review, American Economic Association, vol. 77(4), pages 667-79, September.
- George Baker & Robert Gibbons & Kevin J. Murphy, 2002. "Relational Contracts and the Theory of the Firm," The Quarterly Journal of Economics, Oxford University Press, vol. 117(1), pages 39-84.
- Martin Brown & Armin Falk & Ernst Fehr, 2004.
"Relational Contracts and the Nature of Market Interactions,"
Econometric Society, vol. 72(3), pages 747-780, 05.
- Brown, Martin & Falk, Armin & Fehr, Ernst, 2003. "Relational Contracts and the Nature of Market Interactions," IZA Discussion Papers 897, Institute for the Study of Labor (IZA).
- Bental, B. & Eden, B., 1992.
"Inventories in a Competitive Environment,"
92-19, University of Iowa, Department of Economics.
- José A. Scheinkman & Jack Schechtman, 1983. "A Simple Competitive Model with Production and Storage," Review of Economic Studies, Oxford University Press, vol. 50(3), pages 427-441.
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