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The Institutional Determinants of Bilateral Trade Patterns

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Author Info

  • Henri L.F. de Groot

    ()
    (Faculty of Economics and Business Administration, Vrije Universiteit Amsterdam)

  • Gert-Jan Linders

    ()
    (FEWEB, Vrije Universiteit Amsterdam)

  • Piet Rietveld

    ()
    (FEWEB, Vrije Universiteit Amsterdam)

  • Uma Subramanian

    ()
    (World Bank, Washington)

Abstract

This paper studies the effect of institutions on trade flows, using a gravity modelapproach. We start from a standard gravity equation that incorporates geographical proximity,language, trade policy and common history. These factors reflect the costs of trade acrossgeographical and cultural distance. The quality of governance and the extent of familiaritywith the resulting framework of rules and norms may also affect the costs of doing businessbetween any pair of countries. This paper extends the gravity equation to include proxies forinstitutional quality and institutional homogeneity between trade partners. For this, we useindicators on political stability, regulatory quality, and other proxies that reflect thequality of governance. We test whether institutional homogeneity and institutional quality havean independent impact on the trade volume between pairs of countries. We find that having asimilar law or regulatory framework promotes bilateral trade by 12-18%. Furthermore, a better quality of formal institutions tends to coincide with moretrade. An increase in regulatory quality of one standard deviation from the mean leads to anestimated increase of 20-24% in bilateral trade. Lower corruption similarly accounts for 17-27%extra trade.

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Bibliographic Info

Paper provided by Tinbergen Institute in its series Tinbergen Institute Discussion Papers with number 03-044/3.

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Date of creation: 11 Jun 2003
Date of revision: 30 Oct 2003
Handle: RePEc:dgr:uvatin:20030044

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Web page: http://www.tinbergen.nl

Related research

Keywords: bilateral trade flows; gravity model; institutions;

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  1. Knack, Stephen & Keefer, Philip, 1997. "Does Social Capital Have an Economic Payoff? A Cross-Country Investigation," The Quarterly Journal of Economics, MIT Press, vol. 112(4), pages 1251-88, November.
  2. 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.
  3. Sala-i-Martin, Xavier, 1997. "I Just Ran Two Million Regressions," American Economic Review, American Economic Association, vol. 87(2), pages 178-83, May.
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  5. Obstfeld, Maurice & Rogoff, Kenneth, 2000. "The Six Major Puzzles in International Macroeconomics: Is There a Common Cause?," Center for International and Development Economics Research, Working Paper Series qt0sx02651, Center for International and Development Economics Research, Institute for Business and Economic Research, UC Berkeley.
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  7. James E. Anderson & Douglas Marcouiller, S.J., 1999. "Insecurity and the Pattern of Trade: An Empirical Investigation," Boston College Working Papers in Economics 418, Boston College Department of Economics, revised 03 Aug 2000.
  8. Jeffrey Frankel & Andrew Rose, 2002. "An Estimate Of The Effect Of Common Currencies On Trade And Income," The Quarterly Journal of Economics, MIT Press, vol. 117(2), pages 437-466, May.
  9. Koukhartchouk, Oxana & Maurel, Mathilde, 2003. "Accession to the WTO and EU Enlargement: What Potential for Trade Increase?," CEPR Discussion Papers 3944, C.E.P.R. Discussion Papers.
  10. Schaik, A.B.T.M. van & Beugelsdijk, S., 2001. "Cultuur en economie," Open Access publications from Tilburg University urn:nbn:nl:ui:12-87018, Tilburg University.
  11. Masahisa Fujita & Paul Krugman & Anthony J. Venables, 2001. "The Spatial Economy: Cities, Regions, and International Trade," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262561476, December.
  12. McCallum, John, 1995. "National Borders Matter: Canada-U.S. Regional Trade Patterns," American Economic Review, American Economic Association, vol. 85(3), pages 615-23, June.
  13. Shang-Jin Wei, 2000. "Natural Openness and Good Government," NBER Working Papers 7765, National Bureau of Economic Research, Inc.
  14. 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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  1. The benefits of English
    by chris dillow in Stumbling and Mumbling on 2014-02-18 14:10:48
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