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The impact of international trade on institutions and infrastructure

Author Info

  • Hochman, Gal
  • Tabakis, Chrysostomos
  • Zilberman, David

Abstract

We develop a theoretical model that explores the impact of international trade on both institutions and infrastructure, while explicitly addressing the correlation between institutional quality and infrastructure investment. We show that trade leads to higher infrastructure investment so that domestic firms become more productive and can, thus, better compete internationally. However, infrastructure investment also has a detrimental effect on firms, as it is financed through firm taxation. As a result, when some firms have stronger political ties than others, trade leads to weaker institutions and more cronyism as the government attempts to lower the tax burden on the politically connected firms. Moreover, we show that trade with a partner characterized by high aggregate firm productivity or low firm fixed costs induces a country to invest more heavily in both its infrastructure and its institutional framework.

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Article provided by Elsevier in its journal Journal of Comparative Economics.

Volume (Year): 41 (2013)
Issue (Month): 1 ()
Pages: 126-140

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Handle: RePEc:eee:jcecon:v:41:y:2013:i:1:p:126-140
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/622864

Keywords: Cronyism; Infrastructure; Institutions; International trade; Politically connected firms;

Find related papers by JEL classification:

  • D02 - Microeconomics - - General - - - Institutions: Design, Formation, Operations, and Impact
  • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
  • H54 - Public Economics - - National Government Expenditures and Related Policies - - - Infrastructures

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Cited by:

  1. Michiel Gerritse, 2015. "Does trade cause long-run development? Theory and evidence from countries behind the Suez channel," ERSA conference papers ersa15p1100, European Regional Science Association.

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