IDEAS home Printed from https://ideas.repec.org/p/tin/wpaper/20030044.html
   My bibliography  Save this paper

The Institutional Determinants of Bilateral Trade Patterns

Author

Listed:
  • 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)

Abstract

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.

Suggested Citation

  • 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.
  • Handle: RePEc:tin:wpaper:20030044
    as

    Download full text from publisher

    File URL: http://papers.tinbergen.nl/03044.pdf
    Download Restriction: no

    Other versions of this item:

    References listed on IDEAS

    as
    1. Shang-Jin Wei, 2000. "Natural openness and good government," Policy Research Working Paper Series 2411, The World Bank.
    2. Stephen Knack & Philip Keefer, 1997. "Does Social Capital Have an Economic Payoff? A Cross-Country Investigation," The Quarterly Journal of Economics, Oxford University Press, vol. 112(4), pages 1251-1288.
    3. Jeffrey A. Frankel, 1998. "Introduction to "Regionalization of the World Economy, The"," NBER Chapters,in: The Regionalization of the World Economy, pages 1-6 National Bureau of Economic Research, Inc.
    4. Jeffrey A. Frankel, 1997. "Regional Trading Blocs in the World Economic System," Peterson Institute Press: All Books, Peterson Institute for International Economics, number 72.
    5. Stephen Knack & Philip Keefer, 1995. "Institutions And Economic Performance: Cross-Country Tests Using Alternative Institutional Measures," Economics and Politics, Wiley Blackwell, vol. 7(3), pages 207-227, November.
    6. Shang-Jin Wei & Jeffrey A. Frankel, 1998. "Open Regionalism in a World of Continental Trade Blocs," IMF Staff Papers, Palgrave Macmillan, vol. 45(3), pages 440-453, September.
    7. Sala-i-Martin, Xavier, 1997. "I Just Ran Two Million Regressions," American Economic Review, American Economic Association, vol. 87(2), pages 178-183, May.
    8. Knack, Stephen & Keefer, Philip, 1995. "Institutions and Economic Performance: Cross-Country Tests Using Alternative Institutional Indicators," MPRA Paper 23118, University Library of Munich, Germany.
    9. 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.
    10. Robert E. Hall & Charles I. Jones, 1999. "Why do Some Countries Produce So Much More Output Per Worker than Others?," The Quarterly Journal of Economics, Oxford University Press, vol. 114(1), pages 83-116.
    11. Maurice Obstfeld & Kenneth Rogoff, 2001. "The Six Major Puzzles in International Macroeconomics: Is There a Common Cause?," NBER Chapters,in: NBER Macroeconomics Annual 2000, Volume 15, pages 339-412 National Bureau of Economic Research, Inc.
    12. Jeffrey A. Frankel, 1998. "The Regionalization of the World Economy," NBER Books, National Bureau of Economic Research, Inc, number fran98-1, July.
    13. Koukhartchouk, Oxana & Maurel, Mathilde, 2003. "Accession to the WTO and EU Enlargement: What Potential for Trade Increase?," CEPR Discussion Papers 3944, C.E.P.R. Discussion Papers.
    14. 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.
    15. McCallum, John, 1995. "National Borders Matter: Canada-U.S. Regional Trade Patterns," American Economic Review, American Economic Association, vol. 85(3), pages 615-623, June.
    16. 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.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    bilateral trade flows; gravity model; institutions;

    JEL classification:

    • F14 - International Economics - - Trade - - - Empirical Studies of Trade

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:tin:wpaper:20030044. 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: (Tinbergen Office +31 (0)10-4088900). General contact details of provider: http://edirc.repec.org/data/tinbenl.html .

    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 CitEc recognized a reference but did not link an item in RePEc 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 RePEc Author Service 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.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.