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Exporting to bypass weak institutions

Author

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  • Creane, Anthony
  • Jeitschko, Thomas D.

Abstract

Institutions have been shown to be important for trade and growth. In particular, weak institutions may reduce the returns to product quality, harming domestic welfare and making it attractive to export to countries with strong institutions where quality is better rewarded. We model this alternative story as to why the “good apples are shipped out” and explore whether exporting ameliorates the problems created by weak institutions. We find that, instead, because home prices do not reflect the marginal value of quality, access to developed markets can be welfare reducing. Specifically, there are always export prices such that total welfare (and not just consumer welfare) is harmed by exporting. Furthermore, if the domestic price equilibrates to the export price, then the marginal unit exported reduces total welfare. Exporting can even reduce producer surplus, leading to a contraction of the export industry; although, welfare can decrease even if production of the exported good increases. Thus, our results reinforce the importance of strengthening institutions to help the development of economies.

Suggested Citation

  • Creane, Anthony & Jeitschko, Thomas D., 2016. "Exporting to bypass weak institutions," European Economic Review, Elsevier, vol. 83(C), pages 185-197.
  • Handle: RePEc:eee:eecrev:v:83:y:2016:i:c:p:185-197
    DOI: 10.1016/j.euroecorev.2015.12.008
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    References listed on IDEAS

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    More about this item

    Keywords

    Institutions; Trade; Development; Adverse selection; Moral hazard; Quality;

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality
    • O24 - Economic Development, Innovation, Technological Change, and Growth - - Development Planning and Policy - - - Trade Policy; Factor Movement; Foreign Exchange Policy

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