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Insecurity and the Pattern of Trade: An Empirical Investigation

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  • James E. Anderson

    (Boston College)

  • Douglas Marcouiller, S.J.

    (Boston College)

Abstract

Corruption and imperfect contract enforcement dramatically reduce trade. This paper estimates the reduction, using a structural model of import demand in which transactions costs impose a price markup on traded goods. We find that inadequate institutions constrain trade far more than tariffs do. We also find that omitting indexes of institutional quality from the model leads to an underestimate of home bias. Using a broad sample of countries, we find that the traded goods expenditure share declines significantly as income per capita rises, other things equal. Cross-country variation in the effectiveness of institutions offers a simple explanation of the observed global pattern of trade, in which high-income, capital-abundant countries trade disproportionately with one another.

Suggested Citation

  • James E. Anderson & Douglas Marcouiller, S.J., 1999. "Insecurity and the Pattern of Trade: An Empirical Investigation," Boston College Working Papers in Economics 418, Boston College Department of Economics, revised 03 Aug 2000.
    • Handle: RePEc:boc:bocoec:418
    Note: This paper was previously circulated under the title "Trade, Insecurity and Home Bias: an Empirical Investigation" as NBER WP 7000. This is a revised version of the NBER paper.
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    More about this item

    Keywords

    Corruption; Contractual insecurity;

    JEL classification:

    • F1 - International Economics - - Trade
    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements

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