Trust, Efficient Contracting and Export Upgrading

G. Ndubuisi*, S. Owusu

*Corresponding author for this work

Research output: Contribution to journalArticleAcademicpeer-review

Abstract

Informal contracting institutions constitute an essential part of a country’s overall contracting institution, however, the nascent literature examining the effect of contracting institutions on the quality of products a country produces and exports, have paid a limited attention on the role of informal contracting institutions. We fill this gap in the literature by examining whether higher trust levels, as an informal contracting institution, leads to product-quality upgrading by reducing contractual frictions and opportunistic behaviors. Using industry-level data spanning 1995–2014, we examined this relationship using the generalized difference-in-difference method. We find that contract-intensive industries in trust-intensive societies experience a disproportionally higher increase in the production and export of higher-quality products compared to those industries in low-trusting societies. This result holds after controlling for conventional sources of comparative advantage and formal contracting institution. Hence, the result underscores the importance of informal contracting institutions for improved economic performance and stress the crucial fact that countries with strong and efficient informal institutions can still benefit in market-related activities even in the presence of weak formal institutions.
Original languageEnglish
Number of pages22
JournalEuropean Journal of Development Research
DOIs
Publication statusE-pub ahead of print - 15 Nov 2021

Keywords

  • Informal institution
  • Trust
  • Contractual frictions
  • Export quality
  • TRADE LIBERALIZATION
  • PRODUCT QUALITY
  • INVESTMENT
  • FIRMS
  • INSTITUTIONS
  • PERFORMANCE

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