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Are Inventories a Buffer Against Weak Legal Systems?

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  • Angara V. Raja
  • Hans‐Bernd Schaefer

Abstract

Weak legal enforcement of contracts leads to inefficient breach and an overall increase in breaches for firms and individuals. We suggest that firms use inventory holdings as a means to counteract weak contract enforcement. We test the hypothesis that firms operating in weak legal environments have a higher ratio of inventories to net sales than firms operating in strong legal environments. Empirical evidence in support of the hypothesis using data from over three hundred comparable firms from fourteen product groups across thirty‐nine countries is presented.

Suggested Citation

  • Angara V. Raja & Hans‐Bernd Schaefer, 2007. "Are Inventories a Buffer Against Weak Legal Systems?," Kyklos, Wiley Blackwell, vol. 60(3), pages 415-439, August.
    • Handle: RePEc:bla:kyklos:v:60:y:2007:i:3:p:415-439
    DOI: 10.1111/j.1467-6435.2007.00378.x
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    References listed on IDEAS

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    1. George Baker & Robert Gibbons & Kevin J. Murphy, 2002. "Relational Contracts and the Theory of the Firm," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 117(1), pages 39-84.
    2. Alan S. Blinder, 1986. "Can the Production Smoothing Model of Inventory Behavior be Saved?," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 101(3), pages 431-453.
    3. Martin Brown & Armin Falk & Ernst Fehr, 2004. "Relational Contracts and the Nature of Market Interactions," Econometrica, Econometric Society, vol. 72(3), pages 747-780, May.
    4. Kahn, James A, 1987. "Inventories and the Volatility of Production," American Economic Review, American Economic Association, vol. 77(4), pages 667-679, September.
    5. Bental, Benjamin & Eden, Benjamin, 1993. "Inventories in a Competitive Environment," Journal of Political Economy, University of Chicago Press, vol. 101(5), pages 863-886, October.
    6. José A. Scheinkman & Jack Schechtman, 1983. "A Simple Competitive Model with Production and Storage," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 50(3), pages 427-441.
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    Cited by:

    1. Aboal, Diego & Noya, Nelson & Rius, Andrés, 2014. "Contract Enforcement and Investment: A Systematic Review of the Evidence," World Development, Elsevier, vol. 64(C), pages 322-338.
    2. Sebastián Fleitas & Andrés Rius & Carolina Román & Henry Willebald, 2013. "Contract enforcement, investment and growth in Uruguay since 1870," Documentos de Trabajo (working papers) 13-01, Instituto de Economía - IECON.

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