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Relationship Specificity, Incomplete Contracts and the Pattern of Trade

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  • Nathan Nunn

    (University of British Columbia)

Abstract

When relationship-specific investments are necessary for production, under-investment occurs if contracts cannot be enforced. The efficiency loss from under-investment will differ across industries depending on the importance of relationship-specific investments in the production process. As a consequence, a country's contracting environment may be an important determinant of comparative advantage. To test for this, I construct measures of the efficiency of contract enforcement across countries and the importance of relationship-specific investments across industries. I find that countries with better contract enforcement specialize in industries that rely heavily on relationshipspecific investments. This is true even after controlling for traditional determinants of comparative advantage such as endowments of capital and skilled labor.

Suggested Citation

  • Nathan Nunn, 2005. "Relationship Specificity, Incomplete Contracts and the Pattern of Trade," International Trade 0512018, University Library of Munich, Germany.
    • Handle: RePEc:wpa:wuwpit:0512018
    Note: Type of Document - pdf; pages: 49
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    More about this item

    Keywords

    International trade; Comparative advantage; Relationship- specific investments; Contract enforcement.;
    All these keywords.

    JEL classification:

    • O - Economic Development, Innovation, Technological Change, and Growth
    • P - Political Economy and Comparative Economic Systems

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