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The Institutional Determinants of Bilateral Trade Patterns

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  • Henri L. F. de Groot
  • Gert-Jan Linders
  • Piet Rietveld
  • Uma Subramanian

Abstract

This paper studies the effect of institutions on trade flows, using a gravity model approach. Standard gravity equations incorporate factors such as geographical proximity, language, trade policy and common history as explanatory factors for variation in bilateral trade that reflect the costs of trade across geographical and cultural distance. We extend this type of analysis by focusing on the relevance of the quality of governance and the extent of familiarity with the resulting framework of rules and norms in explaining variation in bilateral trade patterns. More specifically, we test whether institutional homogeneity and institutional quality have an independent impact on the trade volume between pairs of countries. We find that having a similar institutional framework promotes bilateral trade by 13%, on average. Furthermore, a better quality of formal institutions tends to coincide with more trade. Depending on being either importer or exporter, an increase in overall institutional quality of one standard deviation from the mean leads to an estimated increase of 30-44% in bilateral trade. Copyright WWZ and Helbing & Lichtenhahn Verlag AG 2004.

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Bibliographic Info

Article provided by Wiley Blackwell in its journal Kyklos.

Volume (Year): 57 (2004)
Issue (Month): 1 (02)
Pages: 103-123

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Handle: RePEc:bla:kyklos:v:57:y:2004:i:1:p:103-123

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  1. Maurice Obstfeld & Kenneth Rogoff, 2001. "The Six Major Puzzles in International Macroeconomics: Is There a Common Cause?," NBER Chapters, in: NBER Macroeconomics Annual 2000, Volume 15, pages 339-412 National Bureau of Economic Research, Inc.
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  10. David H. Romer & Jeffrey A. Frankel, 1999. "Does Trade Cause Growth?," American Economic Review, American Economic Association, vol. 89(3), pages 379-399, June.
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  12. James E. Rauch, 2001. "Business and Social Networks in International Trade," Journal of Economic Literature, American Economic Association, vol. 39(4), pages 1177-1203, December.
  13. Alan V. Deardorff, 1995. "Determinants of Bilateral Trade: Does Gravity Work in a Neoclassical World?," NBER Working Papers 5377, National Bureau of Economic Research, Inc.
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  1. The benefits of English
    by chris dillow in Stumbling and Mumbling on 2014-02-18 14:10:48
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