Holdup and Comparative Advantage

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