Three essays on limited commitment in open economies

Three essays explore how limited commitment to contract fulfillment may affect allocations in open economies. In the first essay we discuss how the existence of limited contract enforcement in international trade transactions may cause poverty traps to occur in a growth model with neoclassical production functions. Dynamic incentives to fulfill international contracts are easier to provide to high-income agents that have a stronger love-of-variety and investment motives to trade internationally. The extent of the impediments may render countries unable to engage in international exchange at all, in effect keeping them in a poverty trap. Countries with dissimilar initial capital per capita may converge to different steady states. The contracting problems in international exchange that we discuss may block the channel through which, as many researchers believe, international trade affects growth by increasing investment rates. In the second essay we show that limited commitment in international transactions may give a rationale for the existence of intermediaries in international trade or be an argument for handing out quotas. This is because incentives to execute contracts can be provided to agents by creating rents. At the same time exchange may completely break down in perfectly competitive markets. In the final essay we analyze the impact of capital market imperfections and the punishment for loan non-repayment on industry structure upon a trade opening. We find that with limited commitment in lending and bankruptcy (costly in terms of lost future utility) we can explain why large firms that pay higher wages self-select to export without the use of a fixed cost in trade or productivity differences across firms.