Trade, Law, and Product Complexity

By Daniel Berkowitz, Johannes Moenius, Katharina Pistor. Review of Economics and Statistics, 2006

300 citations recorded by the source corpus.

How does the quality of national institutions that enforce the rule of law influence international trade? Anderson and Marcouiller argue that bad institutions located in the importer's country deter international trade because they enable economic predators to steal and extort rents at the importer's border. We complement this research and show how good institutions located in the exporter's country enhance international trade, in particular, trade in complex products whose characteristics are difficult to fully specify in a contract. We argue that both exporter and importer institutions affect international as well as domestic transaction costs in complex and simple product markets. International transaction costs are a part of the costs of trade. Domestic transaction costs affect complex and simple products differently, thereby changing a country's comparative advantage in producing such goods.We find ample empirical evidence for these predictions: countries that have good institutions tend to export more complex products and import more simple products. Furthermore, institutions have a stronger influence on trade via production costs (comparative advantage) than through international transactions costs. International institutions seem to operate as substitutes for domestic institutions, because good domestic institutions are less important for promoting exports in those countries that have signed the New York Convention.

Subfields: Economics and Econometrics, Sociology and Political Science

View Paper: https://www.semanticscholar.org/paper/825313aa9e27b787ef0cc659fc0ed34f3f083fc9

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Citations in the corpus

Unpacking Sources of Comparative Advantage: A Quantitative Approach (2010, unknown): “6The effects of the institutional rule of law on trade flows have also been investigated by Anderson and Marcouillier (2002), Berkowitz et al. (2006), and Ranjan and Lee (2007).”
The Real Exchange Rate and Economic Growth (2009, unknown): “Levchenko (2006), Berkowitz et al. (2006), and Nunn (2007) …nd that countries with poor institutions have comparative disadvantage in institutions-intensive/more complex/relationshipintensive products.”
The Economics of Standardization: An Update (2010, background): “Berkowitz et al (2006) show how good institutions in the exporter country enhance international trade.”
Migrant Networks and Trade: The Vietnamese Boat People as a Natural Experiment (2018, unknown): “This is important, since weak institutions have been shown to significantly and adversely affect trade volumes (Anderson and Marcouiller, 2002; Berkowitz et al., 2006).”
Relationship Specificity, Incomplete Contracts and the Pattern of Trade (2007, unknown): “If instead I compare countries with different legal origins and match country pairs by Qc, then among the pairs of countries that I am comparing Qc ≈ Qc′ and the interaction in (12) is close to zero.”
Foreign direct investment in services and manufacturing productivity growth: evidence for Chile (2008, background): “One can argue that differentiated product industries are characterized by stronger product complexity (Berkowitz et al., 2006).”
Trade, Democracy, and the Gravity Equation (2010, unknown): “For example, before signing a contract with a democratic exporter, importers have to have sufficient confidence to believe they will receive timely shipment of quality products with high probability (Berkowitz et al., 2006).”
Domestic Institutions as a Source of Comparative Advantage (2013, unknown): “In analysis pre-dating Nunn (2007), Berkowitz et al. (2006) consider a variant of equation (1) in which zg is a dummy variable equal to 1 if the good is differentiated in Rauch’s sense and 0 if the good is reference-priced.”