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Investment in Relationship-Specific Assets: Does Finance Matter ?

  • Strieborny Martin
  • Kukenova Madina

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 confum this hypothesis by showing that industries dependent on relationship-specific investment from their suppliers grow disproportionately faster in countries with a strong banking sector. Our work establishes a novel channel through which finance affects the real economy. It also complements the literature that has stressed legally binding contracts as a standard way to promote investment in relationship-specific assets.

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Paper provided by Université de Lausanne, Faculté des HEC, DEEP in its series Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP) with number 11.01.

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Length: 23 pages + appendix and tables
Date of creation: Jan 2011
Handle: RePEc:lau:crdeep:11.01
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Université de Lausanne, Faculté des HEC, DEEP, Internef, CH-1015 Lausanne

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