Insecurity and the Pattern of Trade: An Empirical Investigation

James Anderson () and Douglas Marcouiller

No 418, Boston College Working Papers in Economics from Boston College Department of Economics

Abstract: Corruption and imperfect contract enforcement dramatically reduce trade. This paper estimates the reduction, using a structural model of import demand in which transactions costs impose a price markup on traded goods. We find that inadequate institutions constrain trade far more than tariffs do. We also find that omitting indexes of institutional quality from the model leads to an underestimate of home bias. Using a broad sample of countries, we find that the traded goods expenditure share declines significantly as income per capita rises, other things equal. Cross-country variation in the effectiveness of institutions offers a simple explanation of the observed global pattern of trade, in which high-income, capital-abundant countries trade disproportionately with one another.

Keywords: Corruption; Contractual insecurity (search for similar items in EconPapers)
JEL-codes: F1 D23 O17 (search for similar items in EconPapers)
Date: 1999-02-24, Revised 2000-08-03
Note: This paper was previously circulated under the title "Trade, Insecurity and Home Bias: an Empirical Investigation" as NBER WP 7000. This is a revised version of the NBER paper.
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Published in Review of Economics and Statistics, 2002, 84, 342-352.

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