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

Nathan Nunn

The Quarterly Journal of Economics, 2007, vol. 122, issue 2, 569-600

Abstract: 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.

Date: 2007
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Working Paper: Relationship-Specificity, Incomplete Contracts, and the Pattern of Trade (2007)
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The Quarterly Journal of Economics is currently edited by Robert J. Barro, Lawrence F. Katz, Nathan Nunn, Andrei Shleifer and Stefanie Stantcheva

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