IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this paper or follow this series

Trust-Based Trade

  • Luis Araujo

    (Michigan State University and Fucape)

  • Emanuel Ornelas

    (University of Georgia and IBMEC Business School - Rio de Janeiro)

There is substantially more trade within national borders than across borders. An important explanation for this fact is the weak enforcement of international contracts. We develop a model in which agents build reputations to overcome this institutional failure. The model describes the interplay between institutional quality, reputations and the dynamics of international trade. It also rationalizes several empirical regularities. We find that history matters for trade volumes, but that its effects vary with the institutional setting of the country. The same is true for the efficacy of trade liberalization programs. Moreover, while stricter enforcement of contracts enhances trade in the short run, it makes it harder for individual traders to develop good reputations. We show that this indirect negative effect may produce an "institutional trap": for sufficiently low initial levels of contract enforcement, a small tightening in enforcement reduces future trade flows. We find also that search frictions aggravate the problems created by weak enforceability of contracts, even if they impose no direct cost on agents, but that trade liberalization can mitigate these negative effects.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://professores.ibmecrj.br/erg/dp/papers/dp200508.pdf
Download Restriction: no

Paper provided by Economics Research Group, IBMEC Business School - Rio de Janeiro in its series IBMEC RJ Economics Discussion Papers with number 2005-08.

as
in new window

Length:
Date of creation: 30 Nov 2005
Date of revision:
Handle: RePEc:ibr:dpaper:2005-08
Contact details of provider: Postal: Av. Pres. Wilson 118, 11 andar, Rio de Janeiro, RJ, Brazil, 20030-020
Web page: http://professores.ibmecrj.br/erg/

More information through EDIRC

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as in new window
  1. Alejandro Cuñat & Marc J. Melitz, 2007. "Volatility, Labor Market Flexibility, and the Pattern of Comparative Advantage," CEP Discussion Papers dp0799, Centre for Economic Performance, LSE.
  2. Egan, Mary Lou & Mody, Ashoka, 1992. "Buyer-seller links in export development," World Development, Elsevier, vol. 20(3), pages 321-334, March.
  3. Andrew B. Bernard & J. Bradford Jensen & Stephen J. Redding & Peter K. Schott, 2007. "Firms in International Trade," NBER Working Papers 13054, National Bureau of Economic Research, Inc.
  4. James E. Rauch & Joel Watson, 1999. "Starting Small in an Unfamiliar Environment," NBER Working Papers 7053, National Bureau of Economic Research, Inc.
  5. Henry Overman & Patricia Rice & Anthony Venables, 2010. "Economic Linkages across Space," Regional Studies, Taylor & Francis Journals, vol. 44(1), pages 17-33.
  6. James E. Rauch & Vitor Trindade, 2003. "Information, International Substitutability, and Globalization," American Economic Review, American Economic Association, vol. 93(3), pages 775-791, June.
  7. Anderson James E & Young Leslie, 2006. "Trade and Contract Enforcement," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 5(1), pages 1-36, November.
  8. Eaton, Jonathan & Fernandez, Raquel, 1995. "Sovereign debt," Handbook of International Economics, in: G. M. Grossman & K. Rogoff (ed.), Handbook of International Economics, edition 1, volume 3, chapter 3, pages 2031-2077 Elsevier.
  9. repec:rus:hseeco:123708 is not listed on IDEAS
  10. Jonathan Eaton & Samuel Kortum & Francis Kramarz, 2004. "Dissecting trade: firms, industries, and export destinations," Staff Report 332, Federal Reserve Bank of Minneapolis.
  11. John McMillan & Christopher Woodruff, 1998. "Interfirm Relationships and Informal Credit in Vietnam," William Davidson Institute Working Papers Series 132, William Davidson Institute at the University of Michigan.
  12. McLaren, J, 1996. "Supplier Relations and the Market Context : A Theory of Handshakes," Papers 766, Yale - Economic Growth Center.
  13. Watson, Joel, 1999. "Starting Small and Commitment," University of California at San Diego, Economics Working Paper Series qt37p340fc, Department of Economics, UC San Diego.
  14. Alejandro Izquierdo & Jacques Morriset & Marcelo Olarreaga, 2003. "Information Diffusion in International Markets," IDB Publications (Working Papers) 6509, Inter-American Development Bank.
  15. repec:rus:hseeco:121669 is not listed on IDEAS
  16. Barry Eichengreen & Douglas A. Irwin, 1998. "The Role of History in Bilateral Trade Flows," NBER Chapters, in: The Regionalization of the World Economy, pages 33-62 National Bureau of Economic Research, Inc.
  17. James E. Rauch, 2001. "Business and Social Networks in International Trade," Journal of Economic Literature, American Economic Association, vol. 39(4), pages 1177-1203, December.
  18. Richard Chisik, 2010. "Export Industry Policy and Reputational Comparative Advantage," Working Papers 017, Ryerson University, Department of Economics.
  19. Woodruff, Christopher, 1998. "Contract enforcement and trade liberalization in Mexico's footwear industry," World Development, Elsevier, vol. 26(6), pages 979-991, June.
  20. James E. Anderson & Douglas Marcouiller, 2002. "Insecurity And The Pattern Of Trade: An Empirical Investigation," The Review of Economics and Statistics, MIT Press, vol. 84(2), pages 342-352, May.
  21. Parikshit Ghosh & Debraj Ray, 1995. "Cooperation in Community Interaction Without Information Flows," Boston University - Institute for Economic Development 64, Boston University, Institute for Economic Development.
  22. Simon Johnson & John McMillan & Christopher Woodruff, 2001. "Courts and Relational Contracts," NBER Working Papers 8572, National Bureau of Economic Research, Inc.
  23. Dani Rodrik, 2000. "How Far Will International Economic Integration Go?," Journal of Economic Perspectives, American Economic Association, vol. 14(1), pages 177-186, Winter.
  24. Greif, Avner, 1993. "Contract Enforceability and Economic Institutions in Early Trade: the Maghribi Traders' Coalition," American Economic Review, American Economic Association, vol. 83(3), pages 525-48, June.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:ibr:dpaper:2005-08. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Márcio Laurini)

The email address of this maintainer does not seem to be valid anymore. Please ask Márcio Laurini to update the entry or send us the correct address

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.