Relationship-Specificity, Incomplete Contracts, and the Pattern of Trade

Is a country's ability to enforce contracts an important determinant of comparative advantage? To answer this question, I construct a variable that measures, for each good, the proportion of its intermediate inputs that require relationship-specific investments. Combining this measure with data...

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Bibliographic Details
Published in:	The Quarterly journal of economics 2007-05, Vol.122 (2), p.569-600
Main Author:	Nunn, Nathan
Format:	Article
Language:	eng
Subjects:	Civil law Coefficients Comparative advantage Contract enforcement Contracts Endowments Enforcement Foreign investment Industrial production Industry International trade Manufacturing industries Studies Trade
Online Access:	Get full text
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Summary:	Is a country's ability to enforce contracts an important determinant of comparative advantage? To answer this question, I construct a variable that measures, for each good, the proportion of its intermediate inputs that require relationship-specific investments. Combining this measure with data on trade flows and judicial quality, I find that countries with good contract enforcement specialize in the production of goods for which relationship-specific investments are most important. According to my estimates contract enforcement explains more of the pattern of trade than physical capital and skilled labor combined.
ISSN:	0033-5533 1531-4650