Relative Performance in Bilateral Trade

Concerns for relative performance are integrated into a model of contractual renegotiation in bilateral trade. It is shown that concerns for relative performance do never impede efficient trade. Moreover, conditional on renegotiation to occur, concerns for relative performance tend to mitigate material rent expropriation. However, concerns for relative performance make the occurrence of renegotiation more likely, and may thereby lead to underinvestment even in very optimistic environments. The analysis suggests an explanation for the occurrence of the Druzhba pipeline conflict between Russia and Belarus in January 2007.