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Trade, Law and Product Complexity Daniel Berkowitz*

By Johannes Moenius and Katharina Pistor


How does the quality of national institutions ’ law enforcement influence international trade? Anderson and Marcouiller (2001) argue that bad institutions located in the importer’s country deter international trade because they enable economic predators to steal and extort at the importer’s border. We complement this research and show how good institutions located in the exporter’s country enhance international trade and, in particular, trade in complex products whose characteristics are difficult to fully specify in a contract. We build a model in which exporter and importer institutions impact both international and domestic transaction costs in complex and simple product markets. While international transaction costs affect the costs of trade, domestic transaction costs affect complex and simple products differently, thereby changing comparative advantage. We find strong evidence for the model’s predictions: most notably, the quality of exporter institutions is most important for enhancing trade in complex product markets and the quality of importer institutions is most important for simple markets

Year: 2002
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