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Trust-Based Trade

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Author Info
Luis Araujo (Michigan State University and Fucape)
Emanuel Ornelas (University of Georgia and IBMEC Business School - Rio de Janeiro)

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Abstract

There is substantially more trade within national borders than across borders. An important explanation for this fact is the weak enforcement of international contracts. We develop a model in which agents build reputations to overcome this institutional failure. The model describes the interplay between institutional quality, reputations and the dynamics of international trade. It also rationalizes several empirical regularities. We find that history matters for trade volumes, but that its effects vary with the institutional setting of the country. The same is true for the efficacy of trade liberalization programs. Moreover, while stricter enforcement of contracts enhances trade in the short run, it makes it harder for individual traders to develop good reputations. We show that this indirect negative effect may produce an "institutional trap": for sufficiently low initial levels of contract enforcement, a small tightening in enforcement reduces future trade flows. We find also that search frictions aggravate the problems created by weak enforceability of contracts, even if they impose no direct cost on agents, but that trade liberalization can mitigate these negative effects.

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Publisher Info
Paper provided by Economics Research Group, IBMEC Business School - Rio de Janeiro in its series IBMEC RJ Economics Discussion Papers with number 2005-08.

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Date of creation: 30 Nov 2005
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Handle: RePEc:ibr:dpaper:2005-08

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Web page: http://professores.ibmecrj.br/erg/
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Related research
Keywords: International trade; Export dynamics; Contract enforcement; Reputation;

Other versions of this item:

Find related papers by JEL classification:
F10 - International Economics - - Trade - - - General
F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search, Learning, and Information
L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation

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References listed on IDEAS
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. Eaton, Jonathan & Fernandez, Raquel, 1995. "Sovereign debt," Handbook of International Economics, in: G. M. Grossman & K. Rogoff (ed.), Handbook of International Economics, edition 1, volume 3, chapter 3, pages 2031-2077 Elsevier. [Downloadable!] (restricted)
    Other versions:
  2. Jonathan Eaton & Samuel Kortum & Francis Kramarz, 2004. "Dissecting trade: firms, industries, and export destinations," Staff Report 332, Federal Reserve Bank of Minneapolis. [Downloadable!]
    Other versions:
  3. Barry Eichengreen & Douglas A. Irwin, 1998. "The Role of History in Bilateral Trade Flows," NBER Chapters, in: The Regionalization of the World Economy, pages 33-62 National Bureau of Economic Research, Inc. [Downloadable!]
    Other versions:
  4. Dani Rodrik, 2000. "How Far Will International Economic Integration Go?," Journal of Economic Perspectives, American Economic Association, vol. 14(1), pages 177-186, Winter. [Downloadable!] (restricted)
  5. Chisik, Richard, 2003. "Export industry policy and reputational comparative advantage," Journal of International Economics, Elsevier, vol. 59(2), pages 423-451, March. [Downloadable!] (restricted)
    Other versions:
  6. Bernard, Andrew & Jensen, J Bradford & Redding, Stephen J & Schott, Peter, 2007. "Firms in International Trade," CEPR Discussion Papers 6277, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  7. Watson, Joel, 2002. "Starting Small and Commitment," Games and Economic Behavior, Elsevier, vol. 38(1), pages 176-199, January. [Downloadable!] (restricted)
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  8. Greif, Avner, 1993. "Contract Enforceability and Economic Institutions in Early Trade: the Maghribi Traders' Coalition," American Economic Review, American Economic Association, vol. 83(3), pages 525-48, June. [Downloadable!] (restricted)
  9. Simon Johnson & John McMillan, 2002. "Courts and Relational Contracts," Journal of Law, Economics and Organization, Oxford University Press, vol. 18(1), pages 221-277, April.
    Other versions:
  10. Izquierdo, Alejandro & Morisset, Jacques & Olarreaga, Marcelo, 2003. "Information Diffusion in International Markets," CEPR Discussion Papers 3872, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  11. Henry Overman & Patricia Rice & Anthony J. Venables, 2007. "Economic Linkages Across Space," CEP Discussion Papers dp0805, Centre for Economic Performance, LSE. [Downloadable!]
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  12. Choi, E Kwan & Harrigan, James, 2004. "Handbook of International Trade," Staff General Research Papers 11375, Iowa State University, Department of Economics.
  13. Woodruff, Christopher, 1998. "Contract enforcement and trade liberalization in Mexico's footwear industry," World Development, Elsevier, vol. 26(6), pages 979-991, June. [Downloadable!] (restricted)
  14. repec:rus:hseeco:121669 is not listed on IDEAS
  15. James E. Anderson & Douglas Marcouiller, 2002. "Insecurity And The Pattern Of Trade: An Empirical Investigation," The Review of Economics and Statistics, MIT Press, vol. 84(2), pages 342-352, May. [Downloadable!] (restricted)
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  16. Rauch, James E. & Watson, Joel, 2003. "Starting small in an unfamiliar environment," International Journal of Industrial Organization, Elsevier, vol. 21(7), pages 1021-1042, September. [Downloadable!] (restricted)
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  17. Ghosh, Parikshit & Ray, Debraj, 1996. "Cooperation in Community Interaction without Information Flows," Review of Economic Studies, Blackwell Publishing, vol. 63(3), pages 491-519, July. [Downloadable!] (restricted)
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  18. McLaren, John, 1999. "Supplier relations and the market context: A theory of handshakes," Journal of International Economics, Elsevier, vol. 48(1), pages 121-138, June. [Downloadable!] (restricted)
  19. Alejandro Cuñat & Marc J. Melitz, 2007. "Volatility, Labor Market Flexibility, and the Pattern of Comparative Advantage," NBER Working Papers 13062, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  20. John McMillan & Christopher Woodruff, 1999. "Interfirm Relationships And Informal Credit In Vietnam," The Quarterly Journal of Economics, MIT Press, vol. 114(4), pages 1285-1320, November. [Downloadable!] (restricted)
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  21. James E. Rauch, 2001. "Business and Social Networks in International Trade," Journal of Economic Literature, American Economic Association, vol. 39(4), pages 1177-1203, December. [Downloadable!] (restricted)
  22. James E. Rauch & Vitor Trindade, 2003. "Information, International Substitutability, and Globalization," American Economic Review, American Economic Association, vol. 93(3), pages 775-791, June. [Downloadable!]
  23. Egan, Mary Lou & Mody, Ashoka, 1992. "Buyer-seller links in export development," World Development, Elsevier, vol. 20(3), pages 321-334, March. [Downloadable!] (restricted)
  24. repec:rus:hseeco:123708 is not listed on IDEAS
Full references

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. Buono, Ines & Fadinger, Harald & Berger, Stefan, 2008. "The Micro Dynamics of Exporting: Evidence from French Firms," MPRA Paper 12940, University Library of Munich, Germany. [Downloadable!]
    Other versions:
  2. Brenton, Paul & Saborowski, Christian & von Uexkull, Erik, 2009. "What explains the low survival rate of developing country export flows ?," Policy Research Working Paper Series 4951, The World Bank. [Downloadable!]
  3. Mélise Jaud & Madina Kukenova & Martin Strieborny, 2009. "Financial dependence and intensive margin of trade," PSE Working Papers 2009-35, PSE (Ecole normale supérieure). [Downloadable!]
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This page was last updated on 2009-11-25.

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