Take the goods and run: Contracting frictions and market power in supply chains – HK Online Trade Seminar Series
Dr. Felipe Brugues
Assistant Professor
Instituto Tecnológico Autónomo de México
Firms in developing countries often face concentrated input markets and contracting frictions. This paper studies the efficiency of self-enforced relational agreements, a common solution to contracting frictions, when sellers have significant market power and contracts cannot be enforced through courts. To this end, I develop a dynamic contracting model with limited enforcement in which buyers can default on their trade-credit debt without legal penalties. The model is shown to be identified and is estimated using a new transaction-level dataset from the Ecuadorian manufacturing supply chain. My key empirical finding is that bilateral trade is inefficiently low in early periods of the relationship, but converges toward efficiency over time, despite sellers’ market power. Counterfactual simulations imply that both market power and enforcement contribute to inefficiency gains.
This is a joint seminar organized by HKU, CUHK, City U, HKUST and Lingnan U.
Please contact Xiameng PAN at xmpan@connect.hku.hk for registration.
