We study the welfare impact of rules of origin in free trade agreements where final-good producers source customized inputs from suppliers within the trading bloc. We employ a property-rights framework that features hold-up problems in suppliers' decisions to invest, and where underinvestment is...

We study how a preferential trade agreement (PTA) affects international sourcing decisions, aggregate productivity and welfare under incomplete contracting and endogenous matching. Contract incompleteness implies underinvestment. That inefficiency is mitigated by a PTA, because the agreement...

In a bilateral relationship where the supplier of an intermediate good has to make a relationship-specific investment but cannot write or enforce a complete contract, the standard hold-up problem of underinvestment arises. We show that this problem is aggravated when the buyer is located in a...