Contractual Frictions and the Margins of Trade
A growing body of work has shown that the quality of national institutions that enforce written contracts plays an important role in shaping a country's comparative advantage. Using highly disaggregated bilateral and unique harmonized firm-lev...
| Main Authors: | , , |
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| Language: | English |
| Published: |
World Bank, Washington, DC
2018
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| Subjects: | |
| Online Access: | http://documents.worldbank.org/curated/en/940871540912581932/Contractual-Frictions-and-the-Margins-of-Trade http://hdl.handle.net/10986/30652 |
| Summary: | A growing body of work has shown that
the quality of national institutions that enforce written
contracts plays an important role in shaping a
country's comparative advantage. Using highly
disaggregated bilateral and unique harmonized firm-level
trade data across a large number of countries, this paper
contributes to this literature by providing a comprehensive
analysis of the mechanisms through which institutional
frictions affect the pattern of aggregate trade flow,
distinguishing the effects on the intensive and extensive
margins. The analysis finds that contractual friction
distorts countries' trade pattern beyond its effect on
domestic production structure, by deterring the probability
of exporting (the extensive margin) and export sales after
entry (the intensive margin), particularly in industries
that rely more heavily on relationship-specific inputs (more
vulnerable to holdup problems). The analysis also finds that
contractual frictions matter more for the intensive margin
than the extensive margin of exporting. In addition, better
contracting institutions increase the probability of
survival of new export products in more contract-intensive
industries. These results have important policy implications
for developing countries that seek to boost export growth
but many of which suffer from poor contracting institutions. |
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