Scandinavian Working Papers in Economics

Working Papers,
Lund University, Department of Economics

No 2013:11: Investment in Relationship-Specific Assets: Does Finance Matter?

Martin Strieborny () and Madina Kukenova ()
Additional contact information
Martin Strieborny: Department of Economics, Lund University, Postal: Department of Economics, School of Economics and Management, Lund University, Box 7082, S-220 07 Lund, Sweden
Madina Kukenova: International Trade Centre - Geneva

Abstract: Existing literature highlights opportunistic behavior as the main reason why rational agents underinvest in relationship-specific assets (the hold-up problem). However, a supplier would also be reluctant to undertake relationship-specific investment if she cannot observe financial stability or planning horizon of a buyer. By combining insights from research on relationship-specific investment and signaling role of financial intermediaries, we argue that a strong banking sector can alleviate these information asymmetries between buyers and suppliers. We empirically confirm this hypothesis by showing that industries dependent on relationship-specific investment from their suppliers grow disproportionately faster in countries with a strong banking sector.

Keywords: …nancial development; relationship-speci…c investment; growth

JEL-codes: G21; O16; O40

37 pages, April 24, 2013

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