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Law, Trade, and Development

33 Pages Posted: 7 Apr 2004 Last revised: 7 Feb 2010

Johannes Moenius

University of Redlands

Daniel Berkowitz

University of Pittsburgh - Department of Economics

Date Written: February 4, 2010


This paper uses a Ricardian model to generate predictions about the influence of institutions on trade in differentiated (complex) and commoditized (simple) products and then uses a rich international trade data set for empirical tests. The model draws the distinction between the role of international transactions costs and domestic production costs in the trade of complex and simple products. The effects of institutions predicted by the model are identified with a three step estimation procedure. We find that when countries have low quality institutions, institutional reform primarily influences production costs and has little influence on the volume of trade. Institutional reform, however, increases the diversity of exports in complex goods markets. Conversely, in countries with more developed institutions, institutional reform primarily influences transaction costs and is associated with gains in the volume and the diversity of complex exports.

Keywords: Complex and simple products, volume effect of institutions, compositional effect of institutions

JEL Classification: F10, O10, 019

Suggested Citation

Moenius, Johannes and Berkowitz, Daniel, Law, Trade, and Development (February 4, 2010). William Davidson Institute Working Paper No. 662. Available at SSRN: or

Johannes Moenius (Contact Author)

University of Redlands ( email )

PO Box 3080
Redlands, CA 92373-0999
United States


Daniel Berkowitz

University of Pittsburgh - Department of Economics ( email )

4711 WWPH
Pittsburgh, PA 15260
United States
412-648-7072 (Phone)
412-648-3011 (Fax)


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