impede rapid responses to changes in customers oders and limit the ability to rapidly detect, fix and replace defective components. Focusing on these costs, Harrigan and Venables (2004) show that the demand for timeliness in delivery generates incentives for the clustering of plants around the assembler or retailer.

Guided by this literature, we test whether countries’ ability to enforce contracts and their ability to export on time play a different role in trade of intermediate and in that of final goods. If production occurs as a sequence of tasks and various inputs are all essential to the production of the final good, an input that is not of the required quality (because of the underinvestment due to the hold-up problem) or is missing at the time when it is required (because of export delays) may nullify the value of all other inputs/tasks. Therefore, no discount can compensate the producer of the final good for the unreliable delivery (Kremer, 1993). In contrast, when a good is imported for final consumption, it is plausible that the consumer may accept to buy it for a reduced price even if it is of a lower quality than required or if it is delivered with a delay. For example, while a car manufacturer will not be willing to use a cheap radio in a luxurious car, a consumer that has ordered an expensive radio may compromise on the quality if he gets an adequate discount.

Our empirical strategy consists in estimating a factor content model of trade. In this model, the ability to enforce contracts and to export on time is assumed to determine a country's pattern of trade according to its comparative advantage rather than its trade volume. Hence, we test whether countries with better ability to enforce contracts (export on time) export relatively more institutional-intensive (time-sensitive) goods. In particular, using the UN Broad Economic Categories (BEC) classification to categorize goods according to their main end use<sup>5</sup> , we test whether a country's ability to enforce a contract and its ability to export on time are more important determinants of comparative advantage in intermediate goods than in final goods.

Our paper adds to the existing literature by testing whether the hold-up problem and time matter for the patterns of trade in intermediate goods. Although the theoretical literature defines the hold-up problem with respect to intermediate inputs, previous studies assessing the role of the quality of institutions as a determinant of trade patterns have focused on trade in final goods (which are produced using intensively intermediate goods) rather than on trade in intermediate goods themselves (Nunn, 2007; Levchenko, 2007).<sup>6</sup> Similarly, while the importance of timely delivery has been stressed in particular in relation to production

> 5 Recently, other studies have used the BEC classification to study the patterns of trade in intermediate goods (Bergstrand and Egger, 2010; Miroudot et al., 2009). Our approach, however, is conceptually different from these studies, as they use the gravity model to study the volume of trade, while we focus on the factor content methodology to determine the sectoral pattern of trade.

> 6 Institutional differences are found to be an important determinant of trade flows in a number of recent studies that use the gravity model of trade. For example, Anderson and Marcouiller (2002) and de Groot et al. (2004) show that quality of institutions significantly affects bilateral trade volumes and that better institutions are associated with higher volumes of trade. These models however do not look at institutions as factors affecting comparative advantage.

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