Relationship-Specificity, Incomplete Contracts, and the Pattern of Trade
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CitationNunn, Nathan. 2007. Relationship-specificity, incomplete contracts, and the pattern of trade. Quarterly Journal of Economics 122(2): 569-600.
AbstractIs 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.
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