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Trade, trust and the rule of law

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  • Yu, Shu
  • Beugelsdijk, Sjoerd
  • de Haan, Jakob

Abstract

Well-functioning institutions, both formal (i.e. rule of law) and informal (i.e. trust), facilitate economic exchange. To investigate the nature of the relationship between formal and informal institutions, we analyze bilateral trade patterns in a sample of 16 European countries between 1996–2009. Our results show that trust and rule of law are substitutes, as the positive effect of trust on trade is conditional on the quality of the rule of law. When the rule of law of the importing country increases relative to that of the exporter, the effect of trust on trade decreases. The decline in the effect of trust on trade is less for importers than for exporters, a result that can be attributed to the risk of non-payment that exporters run.

Suggested Citation

  • Yu, Shu & Beugelsdijk, Sjoerd & de Haan, Jakob, 2015. "Trade, trust and the rule of law," European Journal of Political Economy, Elsevier, vol. 37(C), pages 102-115.
    • Handle: RePEc:eee:poleco:v:37:y:2015:i:c:p:102-115
    DOI: 10.1016/j.ejpoleco.2014.11.003
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    Keywords

    Trust; International trade; Institutional quality; Rule of law; Europe;
    All these keywords.

    JEL classification:

    • F1 - International Economics - - Trade
    • Z1 - Other Special Topics - - Cultural Economics
    • K4 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior

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