Trust-Based Trade

Luis Araujo () and Emanuel Ornelas

CEP Discussion Papers from Centre for Economic Performance, LSE

Abstract: Weak enforcement of international contracts can substantially reduce international trade. We develop a model where agents build reputations to overcome the difficulties that this institutional failure causes in a context of incomplete information. The model describes the interplay between institutional quality, reputations and the dynamics of international trade. We find that the conditional probability that a firm will stop exporting decreases and its foreign sales increase as the firm acquires greater export experience. The reason is that the informational costs that an exporter faces fall as the exporter becomes more confident about the reliability of its distributor. An improvement in the institutional quality of a country affects its imports through several distinct channels, as it changes the incentives of both current and potential exporters. Trade liberalization induces current exporters to increase their sales. It could induce entry as well, but this will happen only when the initial tariff is high and/or the institutional quality of the country is low.

Keywords: International trade; Export dynamics; Contract enforcement (search for similar items in EconPapers)
JEL-codes: F10 F13 L14 (search for similar items in EconPapers)
Date: 2007-08
New Economics Papers: this item is included in nep-int
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (30)

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Related works:
Working Paper: Trust-based trade (2007)
Working Paper: Trust-Based Trade (2005)
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Persistent link: https://EconPapers.repec.org/RePEc:cep:cepdps:dp0820

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