Take the Goods and Run: Contracting Frictions and Market Power in Supply Chains

This paper studies the efficiency of self-enforced relational agreements, a common solution to contracting frictions, when sellers have market power and contracts cannot be externally enforced. To this end, I develop a dynamic contracting model with limited enforcement in which buyers can default on their trade credit debt and estimate it using a novel dataset from the Ecuadorian manufacturing supply chain. The key empirical finding is that bilateral trade is inefficiently low in early periods of the relationship, but converges toward efficiency over time, despite sellers' market power. Counterfactual simulations imply that both market power and enforcement contribute to inefficiencies in trade.