Trust, Efficient Contracting and Export Upgrading

Gideon Ndubuisi () and Solomon Owusu ()
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Gideon Ndubuisi: Deutsches Institut für Entwicklungspolitik
Solomon Owusu: Deutsches Institut für Entwicklungspolitik

The European Journal of Development Research, 2022, vol. 34, issue 6, No 5, 2708-2729

Abstract: Abstract Informal contracting institutions constitute an essential part of a country’s overall contracting institution, however, the nascent literature examining the effect of contracting institutions on the quality of products a country produces and exports, have paid a limited attention on the role of informal contracting institutions. We fill this gap in the literature by examining whether higher trust levels, as an informal contracting institution, leads to product-quality upgrading by reducing contractual frictions and opportunistic behaviors. Using industry-level data spanning 1995–2014, we examined this relationship using the generalized difference-in-difference method. We find that contract-intensive industries in trust-intensive societies experience a disproportionally higher increase in the production and export of higher-quality products compared to those industries in low-trusting societies. This result holds after controlling for conventional sources of comparative advantage and formal contracting institution. Hence, the result underscores the importance of informal contracting institutions for improved economic performance and stress the crucial fact that countries with strong and efficient informal institutions can still benefit in market-related activities even in the presence of weak formal institutions.

Keywords: Informal institution; Trust; Contractual frictions; Export quality (search for similar items in EconPapers)
JEL-codes: D70 F00 F10 F14 (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (2)

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DOI: 10.1057/s41287-021-00486-x

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