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Relationship Specificity, Incomplete Contracts and the Pattern of Trade

  • Nathan Nunn

    (University of British Columbia)

When relationship-specific investments are necessary for production, under-investment occurs if contracts cannot be enforced. The efficiency loss from under-investment will differ across industries depending on the importance of relationship-specific investments in the production process. As a consequence, a country's contracting environment may be an important determinant of comparative advantage. To test for this, I construct measures of the efficiency of contract enforcement across countries and the importance of relationship-specific investments across industries. I find that countries with better contract enforcement specialize in industries that rely heavily on relationshipspecific investments. This is true even after controlling for traditional determinants of comparative advantage such as endowments of capital and skilled labor.

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File URL: http://econwpa.repec.org/eps/it/papers/0512/0512018.pdf
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Paper provided by EconWPA in its series International Trade with number 0512018.

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Length: 49 pages
Date of creation: 29 Dec 2005
Date of revision:
Handle: RePEc:wpa:wuwpit:0512018
Note: Type of Document - pdf; pages: 49
Contact details of provider: Web page: http://econwpa.repec.org

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