Relative Performance in Bilateral Trade

Zurich IEER Working Paper No. 327

39 Pages Posted: 13 Jul 2007

See all articles by Christian Ewerhart

Christian Ewerhart

University of Zurich, Department of Economics

Date Written: June 2007

Abstract

Concerns for relative performance are integrated into a model of contractual renegotiation in bilateral trade. It is shown that concerns for relative performance do never impede efficient trade. Moreover, conditional on renegotiation to occur, concerns for relative performance tend to mitigate material rent expropriation. However, concerns for relative performance make the occurrence of renegotiation more likely, and may thereby lead to underinvestment even in very optimistic environments. The analysis suggests an explanation for the occurrence of the Druzhba pipeline conflict between Russia and Belarus in January 2007.

Keywords: Bilateral trade, incomplete contracting, relative performance, renegotiation, Druzhba pipeline

JEL Classification: D86, L95

Suggested Citation

Ewerhart, Christian, Relative Performance in Bilateral Trade (June 2007). Zurich IEER Working Paper No. 327, Available at SSRN: https://ssrn.com/abstract=998485 or http://dx.doi.org/10.2139/ssrn.998485

Christian Ewerhart (Contact Author)

University of Zurich, Department of Economics ( email )

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