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

  • Johannes Moenius


  • Daniel Berkowitz


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.

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Paper provided by William Davidson Institute at the University of Michigan in its series William Davidson Institute Working Papers Series with number 2004-662.

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Length: 37 pages
Date of creation: 01 Feb 2004
Date of revision:
Handle: RePEc:wdi:papers:2004-662
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