Nunn (2007) — “Relationship-Specificity, Incomplete Contracts, and the Pattern of Trade” Flashcards
(8 cards)
💡 Flashcard 1: What is the central question of the study and why is it important?
Does a country’s ability to enforce contracts shape its comparative advantage and pattern of trade?
This matters because relationship-specific investments—which require trust and enforceable agreements—are widespread in modern production. If contracts can’t be enforced, firms underinvest, affecting competitiveness. The study reveals that institutional quality (especially contract enforcement), not just factor endowments, drives trade patterns.
🧪 Flashcard 2: What empirical method does the study use? Is it an RCT or another design?
Not an RCT, but a structural cross-country analysis using trade flow data and judicial quality indices.
Developed a new “contract intensity” index for each industry based on U.S. input–output tables and data from Rauch (1999).
Regressed export patterns on the interaction between industries’ contract intensity and countries’ contract enforcement quality.
Controlled for traditional Heckscher-Ohlin factors (capital, skill), and used instrumental variables (IV) and propensity score matching to address endogeneity.
💰 Flashcard 3: What are the main results of the experiment?
Countries with better judicial quality export relatively more in contract-intensive industries.
Contract enforcement explains more of the global trade pattern than capital and skilled labor endowments combined.
The effect is robust to controls (TFP, intra-industry trade, input variety) and remains significant under IV and matching strategies.
Vertical integration is less effective as a substitute for enforcement in complex industries.
Causal analysis confirms: better enforcement drives specialization, not the reverse.
📈 Flashcard 4: What data and evidence were used, and how?
Trade data: Feenstra (2000), 1997 bilateral exports at the industry level (222 sectors).
Contract intensity: Constructed from U.S. input–output tables and Rauch’s classification of inputs (exchange-traded vs. not).
Contract enforcement: Kaufmann et al. “Rule of Law” index, plus World Bank and Fraser Institute alternatives.
Controls: Capital & skill endowments (Antweiler & Trefler), industry factor intensities, TFP, and intra-industry trade.
Used both OLS and IV (legal origins), plus propensity score matching.
🔍 Flashcard 5: What mechanisms may explain the results?
Hold-up problem: Firms hesitate to invest in customized inputs if contracts are unenforceable.
Comparative advantage via enforcement: Good institutions reduce underinvestment, lowering production costs in contract-intensive industries.
Vertical integration limits: Complex products with many inputs are hard to produce in-house, increasing reliance on enforceable contracts.
Legal origins matter: Historical colonial legal systems influence modern enforcement quality.
🔄 Flashcard 6: How does the study critique existing theories and practices?
Expands on Ricardian and Heckscher-Ohlin trade models by introducing institutions as a source of comparative advantage.
Shows standard models overlook micro-level investment frictions that matter for actual trade flows.
Contrasts with gravity-model studies focused on trade volume; this paper focuses on pattern/composition.
Emphasizes need to embed contracting environment in trade theory and development policy.
🔎 Flashcard 7: Are there any self-critical reflections in the paper?
Reliance on U.S. input–output tables for global input structures may limit external validity.
Measures of contract intensity and enforcement are proxies, not direct observations.
IVs (legal origins) may affect trade via channels other than contracts, violating exclusion restrictions.
Full general equilibrium effects and trade entry decisions are not modeled.
📊 Flashcard 8: What are the policy implications of the findings?
Improving contract enforcement (courts, legal certainty) can reshape a country’s specialization and trade profile.
Legal reforms and judicial efficiency are development tools with direct trade benefits.
Industrial policy should account for institutional readiness—especially in complex, globalized sectors.
Trade facilitation efforts should go beyond tariffs to include contractual infrastructure.
