Holdup and Comparative Advantage

48 Pages Posted: 27 Jul 2013

See all articles by Richard Friberg

Richard Friberg

Stockholm School of Economics - Department of Economics

Katrin Tinn

Imperial College London - Accounting, Finance, and Macroeconomics

Date Written: July 8, 2013

Abstract

We consider a setting where firms need to make irreversible investments to exploit a country’s comparative advantage. Firms are then susceptible to ex-post rent extraction by a transit country or by other agents that are able to limit access to world markets. We develop a general equilibrium model where this potential holdup problem makes such countries poorer and less likely to invest in technology that generates their comparative advantage. The predictions of the model are examined using gravity equations and a new measure of distances that explicitly considers the location of the closest ports. The evidence is consistent with less trade by landlocked countries as a result of the holdup problem we examine.

Keywords: holdup, trade agreements, technology, foreign investments, gravity model

JEL Classification: F10, F50, O24, O40

Suggested Citation

Friberg, Richard and Tinn, Katrin, Holdup and Comparative Advantage (July 8, 2013). Available at SSRN: https://ssrn.com/abstract=2298643 or http://dx.doi.org/10.2139/ssrn.2298643

Richard Friberg

Stockholm School of Economics - Department of Economics ( email )

P.O. Box 6501
Sveavagen 65
S-113 83 Stockholm
Sweden
+46 8 736 9645 (Phone)
+46 8 720 7752 (Fax)

Katrin Tinn (Contact Author)

Imperial College London - Accounting, Finance, and Macroeconomics ( email )

South Kensington campus
London SW7 2AZ
United Kingdom

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