Investment in Relationship-Specific Assets: Does Finance Matter ?

Martin Strieborny and Madina Kukenova

Cahiers de Recherches Economiques du Département d'économie from Université de Lausanne, Faculté des HEC, Département d’économie

Abstract: 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.

Keywords: financial development; relationship-specific investment; growth (search for similar items in EconPapers)
JEL-codes: G21 O16 O40 (search for similar items in EconPapers)
Pages: 23 pages + appendix and tables
Date: 2011-01
New Economics Papers: this item is included in nep-cfn, nep-cis and nep-fdg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (8)

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http://www.hec.unil.ch/deep/textes/11.01.pdf (application/pdf)

Related works:
Journal Article: Investment in Relationship-Specific Assets: Does Finance Matter? (2016)
Working Paper: Investment in Relationship-Specific Assets: Does Finance Matter? (2013)
Working Paper: Investment in Relationship-Specific Assets: Does Finance Matter? (2013)
Working Paper: Investment in Relationship-Specific Assets: Does Finance Matter? (2011)
Working Paper: Investment in Relationship-Specific Assets: Does Finance Matter? (2010)
Working Paper: Investment in Relationship-Specific Assets: Does Finance Matter? (2010)
Working Paper: Investment in Relationship-Specific Assets: Does Finance Matter? (2010)
Working Paper: Investment in Relationship-Specific Assets: Does Finance Matter? (2009)
Working Paper: Investment in Relationship-Specific Assets: Does Finance Matter? (2009)
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Persistent link: https://EconPapers.repec.org/RePEc:lau:crdeep:11.01

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