33 Pages Posted: 7 Apr 2004 Last revised: 7 Feb 2010
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: Suggested Citation
Moenius, Johannes and Berkowitz, Daniel, Law, Trade, and Development (February 4, 2010). William Davidson Institute Working Paper No. 662. Available at SSRN: https://ssrn.com/abstract=525485 or http://dx.doi.org/10.2139/ssrn.525485