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Does Institutional Quality Matter for Trade? Institutional Conditions in a Sectoral Trade Framework

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  • Álvarez, Inmaculada C.
  • Barbero, Javier
  • Rodríguez-Pose, Andrés
  • Zofío, José L.
Abstract
This article examines the extent to which national institutional quality affects bilateral sectoral trade flows, as well as whether the conditioning role of institutions for trade has been waxing or waning with time. Based on a new trade theory framework, we derive a sectoral gravity equation, including novel variables corresponding to the exporter’s labor competitiveness levels, along with importer’s price indices and sectoral incomes, and analyze industry-specific bilateral trade flows of 186 countries for the period 1996–2012. We address potential endogeneity and econometric drawbacks by means of the Poisson Pseudo-Maximum Likelihood estimation methods. The results indicate that both the institutional conditions at destination and the institutional distance between exporting and importing countries are relevant factors for bilateral trade. Moreover, the effect associated with institutional conditions at destination moderately increases over time. This is a robust outcome across economic sectors, with higher values for agriculture and raw materials than for manufacturing and services.

Suggested Citation

  • Álvarez, Inmaculada C. & Barbero, Javier & Rodríguez-Pose, Andrés & Zofío, José L., 2018. "Does Institutional Quality Matter for Trade? Institutional Conditions in a Sectoral Trade Framework," World Development, Elsevier, vol. 103(C), pages 72-87.
    • Handle: RePEc:eee:wdevel:v:103:y:2018:i:c:p:72-87
    DOI: 10.1016/j.worlddev.2017.10.010
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    More about this item

    Keywords

    international trade; gravity equation; institutional quality; public policy;
    All these keywords.

    JEL classification:

    • D02 - Microeconomics - - General - - - Institutions: Design, Formation, Operations, and Impact
    • F10 - International Economics - - Trade - - - General
    • K4 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior
    • Z18 - Other Special Topics - - Cultural Economics - - - Public Policy

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