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Institutional Change and Product Composition: Does the Initial Quality of Institutions Matter?

Author

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  • Johannes Moenius

    ()

  • Daniel Berkowitz

    ()

Abstract

We argue that the quality of institutions that enforce contracts and protect property rights influences the costs of producing high-value added (complex) versus low-value added (simple) products. Since data is hardly available for domestic transactions, we generate predictions about the relationship between the quality of institutions and product composition with an international trade model and use a rich international trade data set for empirical tests. We find that improvements in institutional quality increase the share and volume of a country's complex product exports. However, the initial quality of institutions is important, since in countries with the least developed institutions, the share of complex products in exports is generally small and, institutional reform has almost no influence on simple product exports. These findings cast doubts on the efficacy of institutional reform in countries with underdeveloped institutions.

Suggested Citation

  • Johannes Moenius & Daniel Berkowitz, 2004. "Institutional Change and Product Composition: Does the Initial Quality of Institutions Matter?," William Davidson Institute Working Papers Series 2004-662, William Davidson Institute at the University of Michigan.
  • Handle: RePEc:wdi:papers:2004-662
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    File URL: http://deepblue.lib.umich.edu/bitstream/2027.42/40048/2/wp662.pdf
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    References listed on IDEAS

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    1. La Porta, Rafael & Florencio Lopez-de-Silanes & Andrei Shleifer & Robert W. Vishny, 1997. " Legal Determinants of External Finance," Journal of Finance, American Finance Association, vol. 52(3), pages 1131-1150, July.
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    5. White, Halbert, 1980. "A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity," Econometrica, Econometric Society, vol. 48(4), pages 817-838, May.
    6. Dani Rodrik & Arvind Subramanian & Francesco Trebbi, 2004. "Institutions Rule: The Primacy of Institutions Over Geography and Integration in Economic Development," Journal of Economic Growth, Springer, vol. 9(2), pages 131-165, June.
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    12. Daniel Berkowitz & Johannes Moenius & Katharina Pistor, 2006. "Trade, Law, and Product Complexity," The Review of Economics and Statistics, MIT Press, vol. 88(2), pages 363-373, May.
    13. repec:hrv:faseco:30722111 is not listed on IDEAS
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    Cited by:

    1. Nathan Nunn, 2007. "Relationship-Specificity, Incomplete Contracts, and the Pattern of Trade," The Quarterly Journal of Economics, Oxford University Press, vol. 122(2), pages 569-600.
    2. Rasmusen, Eric, 2017. "A model of trust in quality and North–South trade," Research in Economics, Elsevier, vol. 71(1), pages 159-170.

    More about this item

    Keywords

    Complex and simple products; volume effect of institutions; compositional effect of institutions;

    JEL classification:

    • F14 - International Economics - - Trade - - - Empirical Studies of Trade
    • K33 - Law and Economics - - Other Substantive Areas of Law - - - International Law
    • O24 - Economic Development, Innovation, Technological Change, and Growth - - Development Planning and Policy - - - Trade Policy; Factor Movement; Foreign Exchange Policy
    • P14 - Economic Systems - - Capitalist Systems - - - Property Rights

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