Exporting to Bypass Weak Institutions

40 Pages Posted: 20 Nov 2012 Last revised: 20 Nov 2015

Anthony Creane

University of Kentucky

Thomas D. Jeitschko

Michigan State University - Department of Economics

Date Written: November 19, 2015

Abstract

Institutions have gathered considerable interest as to their effects on international trade and growth. We model how weak institutions can reduce the returns to high quality products, thereby creating inefficiency, and we explore whether the ability to export to markets with strong institutions can alleviate this inefficiency. We find that access to developed markets can exacerbate the problems caused by weak institutions and harm home welfare further, because the exporting decisions are based on home prices that do not accurately capture the value of high quality to the home market. Among other results, first, there is always an export price at which the country is better off if exporting were prevented. Second, any harm is increasing in the amount exported. Third, if some high quality remains on the home market, then home welfare can always be increased by restricting exports. Fourth, the opening of trade can reduce producer surplus and so in the long run lead to a reduction in the production of the export good. Fifth, welfare can decrease even if production of the exported good increases.

Keywords: adverse selection, moral hazard, asymmetric information, quality, trade, development

JEL Classification: D82, F12, L15, O24

Suggested Citation

Creane, Anthony and Jeitschko, Thomas D., Exporting to Bypass Weak Institutions (November 19, 2015). Available at SSRN: https://ssrn.com/abstract=2178116 or http://dx.doi.org/10.2139/ssrn.2178116

Anthony Creane (Contact Author)

University of Kentucky ( email )

Lexington, KY 40506
United States

Thomas D. Jeitschko

Michigan State University - Department of Economics ( email )

110 Marshall-Adams Hall
East Lansing, MI 48824
United States
517-355-8302 (Phone)
517-432-1068 (Fax)

HOME PAGE: http://www.msu.edu/~jeitschk/

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