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Legal Costs as Barriers to Trade

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  • Turrini, Alessandro Antonio
  • van Ypersele, Tanguy

Abstract

Recent evidence shows that the 'home bias puzzle' in international trade may be associated with the mere presence of national borders (McCallum (1995)). In this paper we provide a theoretical framework to explain why borders may matter so much for trade. Our argument is that even between perfectly integrated and similar countries the legal system differs, so that legal costs are higher when business is done abroad. Using a matching model of trade, we show that legal costs asymmetry produce home bias in an essentially different way than traditional trade costs. To estimate the relevance of legal costs in displacing trade we estimate gravity equations augmented with variables capturing the extent of legal asymmetries. Evidence from inter-national trade across OECD countries and intra-national trade across French support the view that legal asymmetries act as relevant obstacles to trade.

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Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 5751.

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Date of creation: Jul 2006
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Handle: RePEc:cpr:ceprdp:5751

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Keywords: cross-border trade; legal costs; matching;

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References

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  1. James E. Anderson & Douglas Marcouiller, 1999. "Trade, Insecurity, and Home Bias: An Empirical Investigation," NBER Working Papers 7000, National Bureau of Economic Research, Inc.
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Citations

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Cited by:
  1. Emanuela Carbonara & Francesco Parisi, 2009. "Choice of law and legal evolution: rethinking the market for legal rules," Public Choice, Springer, vol. 139(3), pages 461-492, June.
  2. Anthony Briant & Pierre-Philippe Combes & Miren Lafourcade, 2009. "Product Complexity, Quality Of Institutions And The Pro-Trade Effect Of Immigrants," PSE Working Papers halshs-00382510, HAL.
  3. G. Corcos & M. Del Gatto & G. Mion & GIP. Ottaviano, 2007. "Productivity and Firm Selection: Intra- vs International Trade," Working Paper CRENoS 200706, Centre for North South Economic Research, University of Cagliari and Sassari, Sardinia.
  4. Anthony Briant & Pierre-Philippe Combes & Miren Lafourcade, 2009. "Product complexity, quality of institutions and the pro-trade effect of immigrants," Working Papers halshs-00566772, HAL.
  5. Anthony Briant & Pierre-Philippe Combes & Miren Lafourcade, 2009. "Product Complexity, Quality Of Institutions And The Pro-Trade Effect Of Immigrants," Working Papers halshs-00382510, HAL.

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