Economic Resilience: Spillovers, Courts, and Vertical Integration

Abstract

We investigate the impact of institutions on the transmission of shocks across firms. Using novel inter-firm wire transfer data, we find that suppliers exposed to natural disasters pass this shock to their customers particularly when the customer's court system is congested. Evidence suggests that congested courts amplify spillovers through potential future holdup problems: customers face frictions both in contracting with new suppliers and in obtaining bank credit. Subsequently, customers seem to vertically integrate the production of affected inputs and obtain liquidity by selling their accounts receivables. Our results highlight the importance of institutions in facilitating economic resilience.

Barter Credit: Warehouses as a Contracting Technology

“…Thus, as discussed by transaction-cost economics literature (Williamson (1975(Williamson ( , 1985, Klein, Crawford, and Alchian (1978)), this potential hold-up problem favors integration as opposed to renting of a silo. Empirical evidence consistent with vertical integration when contract enforcement is limited is provided by Boehm and Oberfield (2020) for India and Fazio, Silva, and Skrastins (2021) for Brazil.…”