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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)

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Abstract

This paper studies the effect of institutions on trade flows, using a gravity model approach. We start from a standard gravity equation that incorporates geographical proximity, language, trade policy and common history. These factors reflect the costs of trade across geographical and cultural distance. The quality of governance and the extent of familiarity with the resulting framework of rules and norms may also affect the costs of doing business between any pair of countries. This paper extends the gravity equation to include proxies for institutional quality and institutional homogeneity between trade partners. For this, we use indicators on political stability, regulatory quality, and other proxies that reflect the quality of governance. 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 law or regulatory framework promotes bilateral trade by 12-18%. Furthermore, a better quality of formal institutions tends to coincide with more trade. An increase in regulatory quality of one standard deviation from the mean leads to an estimated increase of 20-24% in bilateral trade. Lower corruption similarly accounts for 17-27% extra trade.

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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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Related research
Keywords: bilateral trade flows gravity model institutions

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Find related papers by JEL classification:
F14 - International Economics - - Trade - - - Country and Industry Studies of Trade

References listed on IDEAS
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  3. Shang-Jin Wei, 2000. "Natural Openness and Good Government," NBER Working Papers 7765, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  4. 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. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Bjørnskov, Christian, 2005. "Political Ideology and Economic Freedom," Working Papers 05-8, University of Aarhus, Aarhus School of Business, Department of Economics. [Downloadable!]
  2. Arjan M. Lejour & Ruud de Mooij, 2004. "Turkish Delight – Does Turkey’s accession to the EU bring economic benefits?," CESifo Working Paper Series CESifo Working Paper No. , CESifo GmbH. [Downloadable!]
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  3. Simon Guttmann & Anthony Richards, 2004. "Trade Openness: An Australian Perspective," RBA Research Discussion Papers rdp2004-11, Reserve Bank of Australia. [Downloadable!]
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  4. Gert-Jan M. Linders & Arjen Slangen & Henri L.F. de Groot & Sjoerd Beugelsdijk, 2005. "Cultural and Institutional Determinants of Bilateral Trade Flows," Tinbergen Institute Discussion Papers 05-074/3, Tinbergen Institute. [Downloadable!]
  5. Arjan Lejour & J.W. de Paiva Verheijden, 2004. "Services trade within Canada and the European Union. What do they have in common?," CPB Discussion Papers 42, CPB Netherlands Bureau for Economic Policy Analysis. [Downloadable!]
  6. Arjan Lejour & Andrea Mervar & Gerard Verweij, 2007. "The economic effects of Croatia's accession to the EU," CPB Documents 154, CPB Netherlands Bureau for Economic Policy Analysis. [Downloadable!]
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  7. A.M. Lejour & R.A. de Mooij & C.H. Capel, 2004. "Assessing the economic implications of Turkish accession to the EU," CPB Documents 56, CPB Netherlands Bureau for Economic Policy Analysis. [Downloadable!]
  8. Luigi Guiso & Paola Sapienza & Luigi Zingales, 2007. "Cultural Biases in Economic Exchange?," Economics Working Papers ECO2007/42, European University Institute. [Downloadable!]
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  9. Frank A.G. den Butter & Christiaan Pattipeilohy, 2007. "Productivity Gains from Offshoring: an Empirical Analysis for the Netherlands," Tinbergen Institute Discussion Papers 07-089/3, Tinbergen Institute. [Downloadable!]
  10. Aditya Bhattacharjea, 2004. "IMPERIAL LEGACY The Persistence of Colonial Trade Patterns," Working papers 126, Centre for Development Economics, Delhi School of Economics. [Downloadable!]
  11. Nathan Nunn, 2005. "Relationship Specificity, Incomplete Contracts and the Pattern of Trade," International Trade 0512018, EconWPA. [Downloadable!]
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  12. Henri L.F. de Groot & Gert-Jan Linders & Piet Rietveld, 2003. "Why do OECD-Countries trade more?," Tinbergen Institute Discussion Papers 03-092/3, Tinbergen Institute. [Downloadable!]
  13. Arjan Lejour & Vladimir Solanic & Paul Tang, 2006. "EU accession and income growth: an empirical approach," CPB Discussion Papers 72, CPB Netherlands Bureau for Economic Policy Analysis. [Downloadable!]
  14. Gert-Jan M. Linders & Henri L.F. de Groot & Piet Rietveld, 2005. "Institutional Determinants of Bilateral Trade: An Analysis according to Product Type," Tinbergen Institute Discussion Papers 05-023/3, Tinbergen Institute. [Downloadable!]
  15. Subramanian, Uma & Anderson, William P. & Lee, Kihoon, 2005. "Measuring the impact of the investment climate on total factor productivity : the cases of China and Brazil," Policy Research Working Paper Series 3792, The World Bank. [Downloadable!]
  16. Gert-Jan Linders, 2004. "The Effect of Domestic Institutions on International Trade Flows: A sectoral analysis," ERSA conference papers ersa04p357, European Regional Science Association. [Downloadable!]
  17. Amin, Mohammad & Mattoo, Aaditya, 2006. "Do institutions matter more for services ?," Policy Research Working Paper Series 4032, The World Bank. [Downloadable!]
  18. Henk Kox & Arjan Lejour & Raymond Montizaan, 2004. "The free movement of services within the EU," CPB Documents 69, CPB Netherlands Bureau for Economic Policy Analysis. [Downloadable!]
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