The impact of international trade on institutions and infrastructure

Gal Hochman, Chrysostomos Tabakis and David Zilberman

Journal of Comparative Economics, 2013, vol. 41, issue 1, 126-140

Abstract: We develop a theoretical model that explores the impact of international trade on both institutions and infrastructure, while explicitly addressing the correlation between institutional quality and infrastructure investment. We show that trade leads to higher infrastructure investment so that domestic firms become more productive and can, thus, better compete internationally. However, infrastructure investment also has a detrimental effect on firms, as it is financed through firm taxation. As a result, when some firms have stronger political ties than others, trade leads to weaker institutions and more cronyism as the government attempts to lower the tax burden on the politically connected firms. Moreover, we show that trade with a partner characterized by high aggregate firm productivity or low firm fixed costs induces a country to invest more heavily in both its infrastructure and its institutional framework.

Keywords: Cronyism; Infrastructure; Institutions; International trade; Politically connected firms (search for similar items in EconPapers)
JEL-codes: D02 F12 H54 (search for similar items in EconPapers)
Date: 2013
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (11)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jcecon:v:41:y:2013:i:1:p:126-140

DOI: 10.1016/j.jce.2012.07.001

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