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Investment in Relationship-Specific Assets: Does Finance Matter?

  • Martin Strieborny
  • Madina Kukenova

Existing literature sees opportunistic behaviour of contractual partners as the main reason why rational agents underinvest in relationship-specific assets. We look beyond this well-know holdup problem and argue that financial vulnerability and short-term planning horizon can also lead to such underinvestment. Subsequently, banks can stimulate growth-enhancing investment in relationship-specific assets by signalling creditworthiness and long-term planning horizon of their borrowers. We empirically confirm this hypothesis by showing that industries dependent on relationship-specific investment from their suppliers grow disproportionately faster in countries with a strong banking sector

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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 3349.

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Date of creation: 2011
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Handle: RePEc:ces:ceswps:_3349
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