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Trade, trust and the rule of law

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  • Yu, Shu
  • Beugelsdijk, Sjoerd
  • de Haan, Jakob

Abstract

Well-functioning institutions, both formal (i.e. rule of law) and informal (i.e. trust), facilitate economic exchange. To investigate the nature of the relationship between formal and informal institutions, we analyze bilateral trade patterns in a sample of 16 European countries between 1996–2009. Our results show that trust and rule of law are substitutes, as the positive effect of trust on trade is conditional on the quality of the rule of law. When the rule of law of the importing country increases relative to that of the exporter, the effect of trust on trade decreases. The decline in the effect of trust on trade is less for importers than for exporters, a result that can be attributed to the risk of non-payment that exporters run.

Suggested Citation

  • Yu, Shu & Beugelsdijk, Sjoerd & de Haan, Jakob, 2015. "Trade, trust and the rule of law," European Journal of Political Economy, Elsevier, vol. 37(C), pages 102-115.
  • Handle: RePEc:eee:poleco:v:37:y:2015:i:c:p:102-115
    DOI: 10.1016/j.ejpoleco.2014.11.003
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    Cited by:

    1. Christian Bjørnskov & Pierre-Guillaume Méon, 2015. "The productivity of trust," Post-Print CEB, ULB -- Universite Libre de Bruxelles, June.
    2. Anderson, James E. & Borchert, Ingo & Mattoo, Aaditya & Yotov, Yoto V., 2018. "Dark costs, missing data: Shedding some light on services trade," European Economic Review, Elsevier, vol. 105(C), pages 193-214.
    3. repec:bla:worlde:v:40:y:2017:i:5:p:906-930 is not listed on IDEAS
    4. Álvarez, Inmaculada C. & Barbero, Javier & Rodríguez-Pose, Andrés & Zofío, José L., 2018. "Does Institutional Quality Matter for Trade? Institutional Conditions in a Sectoral Trade Framework," World Development, Elsevier, vol. 103(C), pages 72-87.
    5. Melitz, Jacques & Toubal, Farid, 2018. "Somatic distance, cultural affinities, trust and trade," CEPR Discussion Papers 12895, C.E.P.R. Discussion Papers.
    6. Fuchs, Andreas, 2016. "China’s Economic Diplomacy and the Politics-Trade Nexus," Working Papers 0609, University of Heidelberg, Department of Economics.
    7. Beverelli, Cosimo & Keck, Alexander & Larch, Mario & Yotov, Yoto, 2018. "Institutions, Trade and Development: A Quantitative Analysis," School of Economics Working Paper Series 2018-3, LeBow College of Business, Drexel University.
    8. Jimenez-Ayora, Pablo & Ulubaşoğlu, Mehmet Ali, 2015. "What underlies weak states? The role of terrain ruggedness," European Journal of Political Economy, Elsevier, vol. 39(C), pages 167-183.
    9. repec:pal:jintbs:v:49:y:2018:i:9:d:10.1057_s41267-018-0182-4 is not listed on IDEAS
    10. repec:eee:poleco:v:55:y:2018:i:c:p:491-510 is not listed on IDEAS
    11. Jacques Melitz & Farid Toubal, 2018. "Somatic Distance, Trust and Trade," Working Papers 2018-11, CEPII research center.

    More about this item

    Keywords

    Trust; International trade; Institutional quality; Rule of law; Europe;

    JEL classification:

    • F1 - International Economics - - Trade
    • Z1 - Other Special Topics - - Cultural Economics
    • K4 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior

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