This paper proposes an original approach to investigate the influence of insecurity and institutional quality on international trade. We emphasize that insecurity is hardly comparable with other trade barriers such as tariffs because it does not affect all firms similarly. We develop a monopolistic competition trade model with insecurity as a random additional sunk cost for exporting firms. A higher level of insecurity may dissuade large firms to export, while some smaller ones may be able to enter the export market. Hence, insecurity disrupts firms’ selection into export markets, and this has particular effects on trade margins. Two discriminating predictions are derived from the model and confronted to the data. Using individual French firms exports to 100 destination countries, we find clear evidence corroborating our theoretical predictions.
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Paper provided by CEPII research center in its series Working Papers with number
2008-13.
Find related papers by JEL classification: F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies D8 - Microeconomics - - Information, Knowledge, and Uncertainty K4 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior
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