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Imperfect Contract Enforcement and the (In)Efficiency of International Firm Location

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This paper explores the location decisions of final-good producers under imperfect contract enforcement. The legal systems' quality is measured by the contracting environment in each country. The final producers' location decisions create different outcomes in terms of efficiency. We find one inefficient outcome, where final producers locate in the country with the weaker enforcement in pursuit of higher profits, which leads to losses in production and trade. But opening up for international trade and contracting acts as a substitute for a poor legal system, by making final producers prefer the country with the stricter enforcement, leading to an efficient equilibrium.
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Document Type: Research Article

Publication date: 01 September 2011

More about this publication?
  • Founded as Zeitschrift für die gesamte Staatswissenschaft in 1844.

    As one of the oldest journals in the field of political economy, the Journal of Institutional and Theoretical Economics (JITE) deals traditionally with the problems of economics, social policy, and their legal framework. JITE is listed in the Journal of Economic Literature, the Social Science Citation Index, the International Bibliography of the Social Sciences, and COREJ.

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    From 2013 on all accepted articles are published in an Online First version (in their final layout) to make them searchable and citable by their DOI immediately after peer review and acceptance. Once the article is published in an issue of the journal, the Online First version will be removed.

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