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Abstract:
Despite the general belief among economists on the growth-enhancing role of international trade and significant trade opening over the past 25 years, the growth performance of many developing economies, especially of those in Latin America and Africa, has been disappointing. While this poor growth performance has many potential causes, in this paper I argue that part of the reason may be related to the interaction between weak institutions and trade. In particular, I construct a model in which trade opening in societies with weak institutions (in particular autocratic and elite-controlled political systems) may lead to worse economic policies. The reason is that general equilibrium price effects of taxation and expropriation in closed economies also hurt the elites, and this puts a natural barrier against inefficient policies. Trade openness removes this barrier and enables groups with political power to exercise this power in more inefficient ways.

Institutions, Political Economy, Expropriation, Property Rights, International Trade

Abstract:
It has been emphasized that international promotion activities such as state visits or the presence of embassies, consulates and export promotion agencies help foster trade when there are search costs and/or uncertainty. In this paper we try to disentangle the differential effect that foreign service (embassies and consulates) has on both the establishment of trade links with countries, and the effect on trade volumes with already existing trading partners (the extensive and intensive margins at the country level). Using the estimation procedure suggested by Helpman, Melitz and Rubinstein (2007) and a cross-section of 21 exporters and 162 importers as in Rose (2005), we find that the presence of a foreign service office in a given country increases the probability of trading with that partner between 11% and 18%, but that it has no effect on the volume of trade with already existing trading partners. We then proceed to evaluate the importance of the extensive margin at the sectoral level, finding that these probabilities are substantially larger for more differentiated sectors.

Foreign service, uncertainty, extensive margin, intensive margin, gravity

Abstract:
We face uncertainty in most economic decisions we take. This is particularly true in the case of a firm entering a foreign market where there is uncertainty about the size of the market, the distribution channels, the adequacy of the firm's product to local tastes, etc. Despite its obvious importance, this ingredient appears to have been largely overlooked by the literature explaining the direction and volume of international trade flows. We incorporate this informational uncertainty into a model with heterogeneous firms similar to the one proposed by Melitz (2003). The model exhibits informational externalities that arise via informational complementarities: in markets with less uncertainty, the most productive firms always find optimal to enter. Once a firm enters that foreign market, her success/failure reveals information to other domestic firms who, given the new information, optimally decide whether to enter. We characterize the conditions under which, given initial entry, informational externalities are strong enough to reach an equilibrium with full information. The model delivers an explanation for the recent dynamic evolution of trade flows, at the intensive margin at the country level and the extensive margin at the firm/product level. The model also provides insights on the persistence of bilateral trade flows, zero trade flows, and why we observe empirically less entrance by small firms than the Melitz model predicts.

firm heterogeneity, International Trade, Uncertainty, Informational Externalities