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Corruption and Bilateral Trade Flows: Extortion or Evasion?

  • Pushan Dutt

    (NOVA School of Business and Economics, Lisbon, Portugal)

  • Daniel Traca

    (Université Libre de Bruxelles, Solvay Business School, and CEPR)

We analyze the impact of corruption on bilateral trade, highlighting its dual role in terms of extortion and evasion. Corruption taxes trade, when corrupt customs officials in the importing country extort bribes from exporters (extortion effect); however, with high tariffs, corruption may be trade enhancing when corrupt officials allow exporters to evade tariff barriers (evasion effect). We derive and estimate a corruption-augmented gravity model, where the effect of corruption on trade flows is ambiguous and contingent on tariffs. Empirically, corruption taxes trade in the majority of cases, but in high-tariff environments (covering 5% to 14% of the observations) their marginal effect is trade enhancing. (c) 2010 The President and Fellows of Harvard College and the Massachusetts Institute of Technology.

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Article provided by MIT Press in its journal The Review of Economics and Statistics.

Volume (Year): 92 (2010)
Issue (Month): 4 (November)
Pages: 843-860

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Handle: RePEc:tpr:restat:v:92:y:2010:i:4:p:843-860
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