The Institutional Determinants of Bilateral Trade Patterns

21 Pages Posted: 29 Mar 2004

See all articles by Henri L. F. de Groot

Henri L. F. de Groot

VU University Amsterdam - Department of Spatial Economics; Tinbergen Institute

Gert-Jan Linders

Ministry of Social Affairs and Employmen

Piet Rietveld

VU University Amsterdam - Department of Spatial Economics (Deceased)

Uma Subramanian

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Abstract

This paper studies the effect of institutions on trade flows, using a gravity model approach. Standard gravity equations incorporate factors such as geographical proximity, language, trade policy and common history as explanatory factors for variation in bilateral trade that reflect the costs of trade across geographical and cultural distance. We extend this type of analysis by focusing on the relevance of the quality of governance and the extent of familiarity with the resulting framework of rules and norms in explaining variation in bilateral trade patterns. More specifically, we test whether institutional homogeneity and institutional quality have an independent impact on the trade volume between pairs of countries. We find that having a similar institutional framework promotes bilateral trade by 13%, on average. Furthermore, a better quality of formal institutions tends to coincide with more trade. Depending on being either importer or exporter, an increase in overall institutional quality of one standard deviation from the mean leads to an estimated increase of 30-44% in bilateral trade.

Suggested Citation

de Groot, Henri L.F. and Linders, Gert-Jan and Rietveld, Piet and Subramanian, Uma, The Institutional Determinants of Bilateral Trade Patterns. Available at SSRN: https://ssrn.com/abstract=513733

Henri L.F. De Groot (Contact Author)

VU University Amsterdam - Department of Spatial Economics ( email )

De Boelelaan 1105
Amsterdam, 1081 HV
Netherlands
+31 20 598 6168 (Phone)
+31 20 598 6004 (Fax)

Tinbergen Institute

Gustav Mahlerplein 17
Amsterdam, 1082 MS
Netherlands

Gert-Jan Linders

Ministry of Social Affairs and Employmen ( email )

Den Haag
Netherlands

Piet Rietveld

VU University Amsterdam - Department of Spatial Economics (Deceased)

De Boelelaan 1105
1081HV Amsterdam
Netherlands
+31 20 4446097 (Phone)
+31 20 4446004 (Fax)

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