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The Institutional Determinants of Bilateral Trade Patterns

Listed author(s):
  • Henri L.F. de Groot

    ()

    (Faculty of Economics and Business Administration, Vrije Universiteit Amsterdam)

  • Gert-Jan Linders

    ()

    (FEWEB, Vrije Universiteit Amsterdam)

  • Piet Rietveld

    ()

    (FEWEB, Vrije Universiteit Amsterdam)

  • Uma Subramanian

    ()

    (World Bank, Washington)

This paper studies the effect of institutions on trade flows, using a gravity modelapproach. We start from a standard gravity equation that incorporates geographical proximity,language, trade policy and common history. These factors reflect the costs of trade acrossgeographical and cultural distance. The quality of governance and the extent of familiaritywith the resulting framework of rules and norms may also affect the costs of doing businessbetween any pair of countries. This paper extends the gravity equation to include proxies forinstitutional quality and institutional homogeneity between trade partners. For this, we useindicators on political stability, regulatory quality, and other proxies that reflect thequality of governance. We test whether institutional homogeneity and institutional quality havean independent impact on the trade volume between pairs of countries. We find that having asimilar law or regulatory framework promotes bilateral trade by 12-18%. Furthermore, a better quality of formal institutions tends to coincide with moretrade. An increase in regulatory quality of one standard deviation from the mean leads to anestimated increase of 20-24% in bilateral trade. Lower corruption similarly accounts for 17-27%extra trade.

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Paper provided by Tinbergen Institute in its series Tinbergen Institute Discussion Papers with number 03-044/3.

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Date of creation: 11 Jun 2003
Date of revision: 30 Oct 2003
Handle: RePEc:tin:wpaper:20030044
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  1. Shang-Jin Wei, 2000. "Natural openness and good government," Policy Research Working Paper Series 2411, The World Bank.
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  11. van Schaik, A.B.T.M. & Beugelsdijk, S., 2001. "Cultuur en economie," Other publications TiSEM 50d56e94-c91d-4e5d-b630-f, Tilburg University, School of Economics and Management.
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