Cheap talk: transaction costs, quality of institutions, and trade agreements

Leonardo Baccini

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: While there is evidence that politics matter for international cooperation, the impact on economic integration of the quality of institutions has been given short shrift in the previous literature. I argue that the quality of institutions raises the quantity and the quality of information available to potential member states during the bargaining phase of a trade agreement. In turn, this inflow of information reduces the negotiation period of an agreement and, in doing so, dampens the transaction costs associated with it. As a result, countries with good institutions are more likely to form trade agreements. Using original data on both the formation of trade agreements and the duration of negotiations, I quantitatively test this argument. The results strongly support the claim that the quality of institutions is a crucial driver in explaining the recent wave of regionalism.

Keywords: corruption; international cooperation; the rule of law; trade agreement; transaction costs (search for similar items in EconPapers)
JEL-codes: F4 (search for similar items in EconPapers)
Date: 2014-03-19
New Economics Papers: this item is included in nep-int
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Citations: View citations in EconPapers (4)

Published in European Journal of International Relations, 19, March, 2014, 20(1), pp. 80-117. ISSN: 1460-3713

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Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:44923

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