No abstract

Asset specificity can have profound influences on the economic structure of a country. An example is post-colonial Cuba. This article demonstrates that the existence of site specificity in assets generated problems of holdup for sugar mill owners in their contractual relations with cane suppliers. Recognition of that incentive structure offers an institutional explanation for the post-1900 concentration of U.S. investment in the eastern provinces. To reduce transaction costs, mill managers avoided investing in the western part of the island where the sugar industry was well established. A consequence was the relative decline of the western region.

This article argues that one contributing factor to the Cuban Revolution of 1959 was the 1956 revision of U.S. sugar quotas. Its significance has been overlooked because its real economic impact was programmed to occur after 1959. Combining a statistical simulation and an event study of sugar companies' rates of return on equity, we show that the revision had adverse long-run consequences for sugar exports, and that forward-looking investors anticipated them and incorporated them into their valuation of sugar-company stocks after 1953. Further evidence shows that the Batista regime and prominent insurgents understood the vital nature of Cuba's sugar import quota.