Learning, incomplete contracts and export dynamics: Theory and evidence from French firms

Using French firm-level trade data, we provide empirical support for a heterogenous firm model in which exporting requires finding a local partner in each market. In the model, contracts are incomplete, exporters must learn the reliability of their partners through experience and export behaviour is state-dependent due to matching frictions. As predicted by our theoretical model, we find that better legal institutions alleviate contracting frictions especially in sectors with large contracting problems, thereby increasing state dependence more in those sectors. Finally, hazard rates depend on the quality of local legal institutions and decline with the age of the relationship, as unreliable partners are weeded out.