Université de Lausanne
Ecole des HEC
Département d'économétrie et d'économie politique

DEEP-EPFL Seminars in Macroeconomics

Wednesday May 28, 2008, 12:00
Extranef, Dorigny, room 126

Gianmarco OTTAVIANO
(Università degli Studi di Bologna, Italy)

Contract Enforcement, Comparative Advantage and Long-Run Growth

Abstract
The effects of the quality of institutions on economic development and comparative advantage have been so far investigated separately. This paper proposes a theoretical framework in which trade patterns and growth rates are jointly determined by international differences in contract enforcement that affect firms' organizational decisions. In a two-country dynamic Ricardian model with endogenous innovation and hold-up problems, the value chain consists of two activities, innovation and production. Entry in the market happens through R&D and entrants face two decisions. The 'location decision' determines where to place R&D laboratories and production plants. Through the 'ownership decision' firms choose whether to perform innovation andproduction within the same vertically integrated structure or not. In this framework, the quality of contract enforcement drives the ownership decision, which affects R&D returns, research intensity and growth. Balance of payments adjustments cause movements in relative wages, which affect the location decision and, therefore, the pattern of sectoral specialization and international trade.

Web site of the seminar (with paper online): http://www.hec.unil.ch/deep/evenements-english/e-sem-all-2007-08.htm