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Institutional Determinants of Bilateral Trade: Taking Another Look

  • Aljaz Kuncic

This paper examines institutional determinants of bilateral trade in a thorough fashion, paying special attention to the issues of selecting institutional measures (using a new dataset), institutional endogeneity (cleansing the endogenous part) and state of the art gravity trade estimations (controlling for multilateral resistance). In terms of the institutional focus, we emphasize, as de Groot et al. (2004), that institutional distance can be an even more relevant determinant of trade than institutional quality on its own, but correct for the technical and substance shortcomings of the afore mentioned paper. We find that not all institutions matter for trade. The consistent effect is that of the quality of origin and destination country’s legal institutions, which both increase trade. In terms of political and economic institutions, only the quality of origin’s political institutions and destination’s economic institutions increase trade, the latter being most salient. More importantly, we highlight the importance of the effect of institutional distance on trade, showing that economic distance affects trade significantly and negatively, an effect practically impossible to dissipate in any specification. Our conclusion in this research is that countries which are more similar in terms of economic institutions, trade more with each other, and that the quality of legal institutions is always conducive to general trade, but surprisingly does not determine your trade partners. Finally, we show that the use of only one of the proxies generally used by the literature to control for institutional environmentcan be biased and misleading in terms of what is actually being controlled for.

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Paper provided by Kiel Institute for the World Economy in its series Kiel Advanced Studies Working Papers with number 462.

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Length: 22 pages
Date of creation: Aug 2012
Date of revision:
Handle: RePEc:kie:kieasw:462
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  1. 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.
  2. James E. Anderson & Eric van Wincoop, 2000. "Gravity with Gravitas: A Solution to the Border Puzzle," Boston College Working Papers in Economics 485, Boston College Department of Economics.
  3. Marianna Belloc, 2006. "Institutions and International Trade: A Reconsideration of Comparative Advantage," Journal of Economic Surveys, Wiley Blackwell, vol. 20(1), pages 3-26, 02.
  4. Keith Head & Thierry Mayer & John Ries, 2008. "The erosion of colonial trade linkages after independence," Sciences Po publications 6951, Sciences Po.
  5. Henri L.F. de Groot & Gert-Jan Linders & Piet Rietveld & Uma Subramanian, 2003. "The Institutional Determinants of Bilateral Trade Patterns," Tinbergen Institute Discussion Papers 03-044/3, Tinbergen Institute, revised 30 Oct 2003.
  6. Kevin Cowan & Alejandro Neut, 2007. "Intermediate Goods, Institutions and Output per Worker," Working Papers Central Bank of Chile 420, Central Bank of Chile.
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  9. Keith Head & Thierry Mayer, 2011. "Gravity, market potential and economic development," Journal of Economic Geography, Oxford University Press, vol. 11(2), pages 281-294, March.
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  12. Sambit Bhattacharyya & Steve Dowrick & Jane Golley, 2007. "Institutions and Trade: Competitors or Complements in Economic Development?," DEGIT Conference Papers c012_005, DEGIT, Dynamics, Economic Growth, and International Trade.
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  17. Baldwin, Richard & Taglioni, Daria, 2006. "Gravity for Dummies and Dummies for Gravity Equations," CEPR Discussion Papers 5850, C.E.P.R. Discussion Papers.
  18. Daron Acemoglu & Simon Johnson & James A. Robinson, 2001. "The Colonial Origins of Comparative Development: An Empirical Investigation," American Economic Review, American Economic Association, vol. 91(5), pages 1369-1401, December.
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