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Institutional Change and Product Composition: Does the Initial Quality of Institutions Matter?

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  • Johannes Moenius
  • Daniel Berkowitz

Abstract

We argue that the quality of institutions that enforce contracts and protect property rights influences the costs of producing high-value added (complex) versus low-value added (simple) products. Since data is hardly available for domestic transactions, we generate predictions about the relationship between the quality of institutions and product composition with an international trade model and use a rich international trade data set for empirical tests. We find that improvements in institutional quality increase the share and volume of a country's complex product exports. However, the initial quality of institutions is important, since in countries with the least developed institutions, the share of complex products in exports is generally small and, institutional reform has almost no influence on simple product exports. These findings cast doubts on the efficacy of institutional reform in countries with underdeveloped institutions.

Suggested Citation

  • Johannes Moenius & Daniel Berkowitz, 2004. "Institutional Change and Product Composition: Does the Initial Quality of Institutions Matter?," William Davidson Institute Working Papers Series 2004-662, William Davidson Institute at the University of Michigan.
    • Handle: RePEc:wdi:papers:2004-662
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    References listed on IDEAS

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    Cited by:

    1. Nathan Nunn, 2007. "Relationship-Specificity, Incomplete Contracts, and the Pattern of Trade," The Quarterly Journal of Economics, Oxford University Press, vol. 122(2), pages 569-600.
    2. Rasmusen, Eric, 2017. "A model of trust in quality and North–South trade," Research in Economics, Elsevier, vol. 71(1), pages 159-170.
    3. Chung Nguyen Hoang, 2021. "The Effects of Economic Integration on CO2 Emission: A View from Institutions in Emerging Economies," International Journal of Energy Economics and Policy, Econjournals, vol. 11(2), pages 374-383.
    4. Canh Phuc Nguyen & Nhi Ai Nguyen & Christophe Schinckus & Thanh Dinh Su, 2018. "The Ambivalent Role of Institutions in the CO2 Emissions: The Case of Emerging Countries," International Journal of Energy Economics and Policy, Econjournals, vol. 8(5), pages 7-17.
    5. Jesus Maria Irigoyen & Josefa Monteagudo & Alexander Rutkowski, 2012. "A closer look at some drivers of trade performance at Member State level," Quarterly Report on the Euro Area (QREA), Directorate General Economic and Financial Affairs (DG ECFIN), European Commission, vol. 11(2), pages 29-39, July.
    6. Jung, Juan, 2020. "Institutions and Telecommunications Investment," Information Economics and Policy, Elsevier, vol. 50(C).
    7. Francesca D'Auria & Jesus Maria Irigoyen & Josefa Monteagudo & Plamen Nikolov & Alexander Rutkowski & Michael Sket & Ann-Louise Winther, . "Quarterly Report on the Euro Area (QREA), Vol.11, No.2 (2012)," Quarterly Report on the Euro Area (QREA), Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.

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    More about this item

    Keywords

    Complex and simple products; volume effect of institutions; compositional effect of institutions;
    All these keywords.

    JEL classification:

    • F14 - International Economics - - Trade - - - Empirical Studies of Trade
    • K33 - Law and Economics - - Other Substantive Areas of Law - - - International Law
    • O24 - Economic Development, Innovation, Technological Change, and Growth - - Development Planning and Policy - - - Trade Policy; Factor Movement; Foreign Exchange Policy
    • P14 - Political Economy and Comparative Economic Systems - - Capitalist Economies - - - Property Rights

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