ARE INVENTORIES A BUFFER AGAINST WEAK LEGAL SYSTEMS?
A.V. Raja and Hans-Bernd Schäfer
"ARE INVENTORIES A BUFFER AGAINST WEAK LEGAL SYSTEMS?",
German Working Papers in Law and Economics:
Printing Tip: Select the option to 'print as image' in the Acrobat print dialog to ensure the article prints as it appears on screen.
Weak enforcement of contracts leads to inefficient breach of contract and to an overall increase of contract breaches for firms and individuals. Existing literature on contract enforcement has focussed on self-enforcing contracts and contracts within a relationship, family or clan. At the firm level the focus is on ownership structures and vertical integration. Here, we suggest that firms use inventory holdings as a means to counteract weak contract enforcement. We test the hypothesis that firms operating in weak legal environments have a higher ratio of inventories to net sales than firms operating in strong legal environments. We present a conceptual model and empirical evidence in support of the hypothesis using data from over three hundred firms from fourteen product groups across thirty nine countries.