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Institutions and export dynamics

  • Luis Araujo

    ()

    (Michigan State University)

  • Giordano Mion

    ()

    (London School of Economics)

  • Emanuel Ornelas

    ()

    (London School of Economics)

We study the role of contract enforcement in shaping the dynamics of international trade at the firm level. We develop a theoretical model to describe how agents build reputations to overcome the problems created by weak enforcement of international contracts. We find that, all else equal, exporters start their activities with higher volumes and remain as exporters for a longer period in countries with better contracting institutions. However, conditional on survival, the growth rate of a firm’s exports to a country decreases with the quality of the country’s institutions. We test these predictions using a rich panel of Belgium exporting firms from 1995 to 2008 to every country in the world. We adopt two alternative empirical strategies. In one specification we use firm-year fixed effects to control for time-varying firm-specific characteristics. Alternatively, we model selection more explicitly with a two-step Heckman procedure using “extended gravity” variables as our exclusion restrictions. Results from both specifications support our predictions. Overall, our findings suggest that weak contracting institutions cannot be thought simply as an extra sunk or fixed cost to exporting firms; they also significantly affect firms’ trade volumes and have manifold implications for firms’ dynamic patterns in foreign markets.

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Paper provided by National Bank of Belgium in its series Working Paper Research with number 220.

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Length: 54 pages
Date of creation: Feb 2012
Date of revision:
Handle: RePEc:nbb:reswpp:201202-220
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