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Trade, Trust and Institutions

Author

Listed:
  • Shu Yu
  • Jakob de Haan
  • Sjoerd Beugelsdijk

Abstract

To investigate the relation between trust and formal institutions, we analyze bilateral trade patterns in a sample of 16 European countries between 1996-2009. Trust in trading partners has a significant positive effect on bilateral trade. However, our results suggest that trust and formal institutions are substitutes, as the positive effect of trust on trade is conditional on the quality of formal institutions. When the institutional quality of the importing country increases, the effect of trust on trade decreases, and eventually becomes insignificant. The decline in the effect of trust on trade is less when the exporting country’s institutional quality improves.

Suggested Citation

  • Shu Yu & Jakob de Haan & Sjoerd Beugelsdijk, 2011. "Trade, Trust and Institutions," CESifo Working Paper Series 3571, CESifo Group Munich.
  • Handle: RePEc:ces:ceswps:_3571
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    File URL: http://www.cesifo-group.de/DocDL/cesifo1_wp3571.pdf
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    References listed on IDEAS

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    Cited by:

    1. Horváth, Roman, 2013. "Does trust promote growth?," Journal of Comparative Economics, Elsevier, vol. 41(3), pages 777-788.
    2. Bala Ramasamy & Matthew C.H. Yeung, 2012. "Ethical distance and difference in Bilateral trade," Working Papers 11012, Asia-Pacific Research and Training Network on Trade (ARTNeT), an initiative of UNESCAP and IDRC, Canada..

    More about this item

    Keywords

    trust; international trade; institutional quality;

    JEL classification:

    • F10 - International Economics - - Trade - - - General
    • Z10 - Other Special Topics - - Cultural Economics - - - General
    • K40 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - General

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