INVESTMENT AND CONTRACT ENFORCEMENT IN TRANSITION: EVIDENCE FROM HUNGARY
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Contract enforcement problems are a significant constraint on investment and growth, especially so in developing and transition economies. Evidence on these effects is mostly limited to case studies. This paper analyses the impact of contractual breaches on capital investment, using a unique dataset of Hungarian agricultural enterprises who contract production to processing firms. Contract breaches, under the form of delayed payments for supplied products, have a significant negative effect on investment at the primary production level. They occur more when the expected benefits from breaching are larger, e.g. when the price of capital is high, and when expected costs are lower, due to poor external contract enforcement or lower private enforcement capital.