Abstract
This paper presents a competitive model in which exchange rate uncertainty has real effects on how trade contracts are written and executed. In this model, exporting firms have an incentive to delay delivery on trade contracts whenever they can sell their products on the domestic market for a higher price than the domestic currency value of the price specified by the trade contracts. In general, it is costly for a firm to offer a credible commitment to the promised delivery date of a trade contract. We demonstrate that under certain conditions a firm can costlessly commit to a policy of no delivery lags by the appropriate choice of the currency of denomination of trade contracts.
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