Relationship-Specificity, Incomplete Contracts, and the Pattern of Trade
TL;DR: This paper found that countries with better contract enforcement specialize in industries that rely heavily on relationship-specific investments, and this is true even after controlling for traditional determinants of comparative advantage such as endowments of capital and skilled labor.
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.
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TL;DR: The authors argued that the historical origin of a country's laws is highly correlated with a broad range of its legal rules and regulations, as well as with economic outcomes, and they summarized this evidence and attempted a unified interpretation.
Abstract: In the last decade, economists have produced a considerable body of research suggesting that the historical origin of a country's laws is highly correlated with a broad range of its legal rules and regulations, as well as with economic outcomes. We summarize this evidence and attempt a unified interpretation. We also address several objections to the empirical claim that legal origins matter. Finally, we assess the implications of this research for economic reform.
2,134 citations
01 Jan 2009
TL;DR: In this article, the authors show that undervaluation of the currency (a high real exchange rate) stimulates economic growth, particularly for developing countries, and they present two categories of explanations for why this may be so, the first focusing on institutional weaknesses, and the second on product market failures.
Abstract: I show that undervaluation of the currency (a high real exchange rate) stimulates economic growth. This is true particularly for developing countries. This finding is robust to using different measures of the real exchange rate and different estimation techniques. I also provide some evidence that the operative channel is the size of the tradable sector (especially industry). These results suggest that tradables suffer disproportionately from the government or market failures that keep poor countries from converging toward countries with higher incomes. I present two categories of explanations for why this may be so, the first focusing on institutional weaknesses, and the second on product-market failures. A formal model elucidates the linkages between the real exchange rate and the rate of economic growth.
1,453 citations
Cites background or methods from "Relationship-Specificity, Incomplet..."
...Levchenko (2004); Berkowitz, Moenius, and Pistor (2006); Nunn (2007)....
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...Nunn (2007)....
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...…not 17.9 7.5 sold on exchanges and not reference-pricedc Share in gross output of intermediates 31.5 9.7 not sold on exchangesc Source: Author’s calculations. a. Unweighted averages, from the U.S. input-output tables, calculated using data provided by Nathan Nunn, based on Nunn (2007). b....
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TL;DR: This paper used data on bilateral trust between European countries and found that lower bilateral trust leads to less trade between two countries, less portfolio investment, and less direct investment, even after controlling for the characteristics of the two countries.
Abstract: How much do cultural biases affect economic exchange? We answer this question by using data on bilateral trust between European countries. We document that this trust is affected not only by the characteristics of the country being trusted, but also by cultural aspects of the match between trusting country and trusted country, such as their history of conflicts and their religious, genetic, and somatic similarities. We then find that lower bilateral trust leads to less trade between two countries, less portfolio investment, and less direct investment, even after controlling for the characteristics of the two countries. This effect is stronger for goods that are more trust intensive. Our results suggest that perceptions rooted in culture are important (and generally omitted) determinants of economic exchange.
1,313 citations
TL;DR: In this article, a simple model of international trade is proposed, in which institutional differences are modeled within the framework of incomplete contracts and empirically whether institutions act as a source of trade, using data on US imports disaggregated by country and industry.
Abstract: Institutions — quality of contract enforcement, property rights, shareholder protection, and the like — have received a great deal of attention in recent years. Yet trade theory has not considered the implications of institutional differences, beyond treating them simply as different technologies or taxes. The purpose of this paper is twofold. First, we propose a simple model of international trade in which institutional differences are modeled within the framework of incomplete contracts. We show that doing so reverses many of the conclusions obtained by equating institutions with productivity. Institutional differences as a source of comparative advantage imply, among other things, that the less developed country may not gain from trade, and factor prices may actually diverge as a result of trade. Second, we test empirically whether institutions act as a source of trade, using data on US imports disaggregated by country and industry. The empirical results provide evidence of “institutional content of trade:” institutional differences are an important determinant of trade flows.
744 citations
TL;DR: The authors identified and quantified the three mechanisms through which credit constraints severely restrict international trade: the selection of hetero- geneous products into domestic production, selection of domestic manufacturers into exporting, and the level of exports.
Abstract: Financial market imperfections severely restrict international trade ‡ows because exporters require external capital This paper identi…es and quanti…es the three mechanisms through which credit constraints aect trade: the selection of hetero- geneous …rms into domestic production, the selection of domestic manufacturers into exporting, and the level of …rm exports I incorporate …nancial frictions into a heterogeneous-…rm model and apply it to aggregate trade data for a large panel of countries I establish causality by exploiting the variation in …nancial development across countries and the variation in …nancial vulnerability across sectors About 20%-25% of the impact of credit constraints on trade is driven by reductions in total output Of the additional, trade-speci…c eect, one third re‡ects limited …rm entry into exporting, while two thirds are due to contractions in exporters'sales Finan- cially developed economies export more in …nancially vulnerable sectors because they enter more markets, ship more products to each destination, and sell more of each product These results have important policy implications for less developed nations that rely on exports for economic growth but suer from weak …nancial institutions
626 citations
References
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TL;DR: The authors discusses the central role of propensity scores and balancing scores in the analysis of observational studies and shows that adjustment for the scalar propensity score is sufficient to remove bias due to all observed covariates.
Abstract: : The results of observational studies are often disputed because of nonrandom treatment assignment. For example, patients at greater risk may be overrepresented in some treatment group. This paper discusses the central role of propensity scores and balancing scores in the analysis of observational studies. The propensity score is the (estimated) conditional probability of assignment to a particular treatment given a vector of observed covariates. Both large and small sample theory show that adjustment for the scalar propensity score is sufficient to remove bias due to all observed covariates. Applications include: matched sampling on the univariate propensity score which is equal percent bias reducing under more general conditions than required for discriminant matching, multivariate adjustment by subclassification on balancing scores where the same subclasses are used to estimate treatment effects for all outcome variables and in all subpopulations, and visual representation of multivariate adjustment by a two-dimensional plot. (Author)
23,744 citations
TL;DR: The Economic Institutions of Capitalism as mentioned in this paper is a seminal work in the field of economic institutions of capitalism. Journal of Economic Issues: Vol. 21, No. 1, pp. 528-530.
Abstract: (1987). The Economic Institutions of Capitalism. Journal of Economic Issues: Vol. 21, No. 1, pp. 528-530.
16,767 citations
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TL;DR: In this article, the authors examined legal rules covering protection of corporate shareholders and creditors, the origin of these rules, and the quality of their enforcement in 49 countries and found that common-law countries generally have the strongest, and French civil law countries the weakest, legal protections of investors, with German- and Scandinavian-civil law countries located in the middle.
Abstract: This paper examines legal rules covering protection of corporate shareholders and creditors, the origin of these rules, and the quality of their enforcement in 49 countries. The results show that common-law countries generally have the strongest, and Frenchcivil-law countries the weakest, legal protections of investors, with German- and Scandinavian-civil-law countries located in the middle. We also find that concentration of ownership of shares in the largest public companies is negatively related to investor protections, consistent with the hypothesis that small, diversified shareholders are unlikely to be important in countries that fail to protect their rights.
13,984 citations
10,771 citations
TL;DR: The authors showed that countries with poorer investor protections, measured by both the character of legal rules and the quality of law enforcement, have smaller and narrower capital markets than those with stronger investor protections.
Abstract: Using a sample of 49 countries, we show that countries with poorer investor protections, measured by both the character of legal rules and the quality of law enforcement, have smaller and narrower capital markets. These findings apply to both equity and debt markets. In particular, French civil law countries have both the weakest investor protections and the least developed capital markets, especially as compared to common law countries.
10,005 citations
"Relationship-Specificity, Incomplet..." refers background in this paper
...In addition, La Porta et al. (1997, 1998) and Acemoglu and Johnson (2003) find that a country’s legal origin also affects its financial development....
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