Contractual imperfections and the impact of crises on trade: Evidence from industry-level data

Abstract

We use industry-level data to study the effects of imperfect contract enforcement on international trade during crises. To guide the empirical work, we build a simple trade model with contractual imperfections, in which an adverse aggregate shock in the importing country generates a disproportionate decline in imports in more contractually vulnerable industries. Using disaggregated trade data for more than 120 countries and different industry measures of contractual dependence, we find robust support for the model's predictions. Our empirical approach exploits the variation in the occurrence of recessions and financial crises across countries and years, and the variation in contractual dependence across manufacturing industries. We show that the amplification effects of contractual dependence on sectoral imports are statistically and economically significant.