Contractual Frictions and the Patterns of Trade: The Role of Generalized Trust

Abstract

Extant studies on the relationship between “domestic institutions, comparative advantage and international specialization” have largely focused on formal institutions. This paper contributes to this literature by focusing on domestic informal contracting institution vis-á-vis generalized trust as a source of comparative advantage. Employing a bilateral industry trade data, the paper finds a robust evidence that countries with high generalized trust level export relatively more in industries that that are prone to contractual frictions. Results on export margins further suggest that countries with high generalized trust level enter more markets, ship more products to each destination, and have higher export per product and export intensities in those industries. On the one hand, the results reemphasizes the importance of trust for improved economic performance. On the other hand, it offers explanation as to why a country though poorly endowed with weak formal domestic institutions may still have a comparative cost advantage in industries that are more prone to contractual frictions due to having strong domestic informal institutions such as generalized trust