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Contractual Imperfections and the Impact of Crises on Trade: Evidence from Industry-Level Data

Renzo Castellares () and Jorge Salas ()

No 2016-001, Working Papers from Banco Central de Reserva del Perú

Abstract: We build a simple trade model in which: (i) exporters are paid after delivery of the goods, and (ii) complementarity exists between procyclical contract enforcement at the importing-country level and contractual vulnerability at the industry level. In the model, an adverse aggregate shock in the importing country generates a disproportionate decline in imports in more contractually vulnerable industries. Using disaggregated bilateral trade data for more than 100 countries, we find robust support for the model’s predictions. Our empirical approach exploits the variation in the occurrence of recessions and financial crises across countries from 1989 to 2006, and the variation in contractual dependence across manufacturing industries. The estimated amplification effects of contractual dependence on sectoral imports are statistically significant and economically important. Our analysis uses different industry measures of contractual vulnerability, including measures of product complexity and a novel indicator of uncollectible credit sales.

Keywords: Trade; recessions; financial crises; contract enforcement; default risk; industry-level data (search for similar items in EconPapers)
JEL-codes: F1 F41 G01 G32 (search for similar items in EconPapers)
Date: 2016-04
New Economics Papers: this item is included in nep-cta and nep-int
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Journal Article: Contractual imperfections and the impact of crises on trade: Evidence from industry-level data (2019) Downloads
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