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Contractual Frictions and the Margins of Trade (English)

A growing body of work has shown that the quality of national institutions that enforce written contracts plays an important role in shaping a country's comparative advantage. Using highly disaggregated bilateral and unique harmonized firm-level trade data across a large number of countries, this paper contributes to this literature by providing a comprehensive analysis of the mechanisms through which institutional frictions affect the pattern of aggregate trade flow, distinguishing the effects on the intensive and extensive margins. The analysis finds that contractual friction distorts countries' trade pattern beyond its effect on domestic production structure, by deterring the probability of exporting (the extensive margin) and export sales after entry (the intensive margin), particularly in industries that rely more heavily on relationship-specific inputs (more vulnerable to holdup problems). The analysis also finds that contractual frictions matter more for the intensive margin than the extensive margin of exporting. In addition, better contracting institutions increase the probability of survival of new export products in more contract-intensive industries. These results have important policy implications for developing countries that seek to boost export growth but many of which suffer from poor contracting institutions.


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    Azomahou,Theophile Thomas, Maemir,Hibret Belete, Wako,Hassen A.

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    Policy Research Working Paper

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    The World Region,

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    Contractual Frictions and the Margins of Trade

  • Keywords

    pattern of trade; cost of contract enforcement; Trade & International Integration; comparative advantage; International Trade; trade datum; human capital endowment; domestic production; trade pattern; limited contract enforcement; amount of export; parameter of interest; natural resource endowment; natural resource intensity; years of schooling; measure of trade; Rule of Law; natural resource rent; role of technology; description of data; impact of trade; survival rate; domestic institution; export product; factor endowment; foreign market; product variety; credit constraint; panel data; exporting country; estimation technique; positive value; empirical literature; export market; standard error; estimation procedure; alternative measure; standard deviation; reference price; open market; intermediate input; important component; empirical model; export activity; independent variable; monetary cost; export growth; missing value; selection model; export dynamics; destination market; aggregate measure; incomplete contract; export good; exclusion restriction; bilateral trade; cheap supply; export entry; weighted average; partner country; panel regression; lagged value; country variation; input use; export sector; legal origin; positive impact; proportionate expansion; basic model; constant term; idiosyncratic error; gravity equation; customs agency; business startup; legal procedure; export transaction; selection bias; robustness check; customs datum; quality indicators; variable cost; destination country; judicial quality; export data; increased export; endogeneity issue; trading partner; trading volume; political institution; Research Support; financial dependence; institutional change; aggregate exports; transition country; transition countries; equity market; development policy; descriptive statistic; open access; important policy; trade flow; firm-level trade; cost advantage; regression results; written contract; National Institutions; cross-sectional data; total trade; trade volume; summary statistic; countries exports; firm level



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Azomahou,Theophile Thomas Maemir,Hibret Belete Wako,Hassen A.

Contractual Frictions and the Margins of Trade (English). Policy Research working paper,no. WPS 8631 Washington, D.C. : World Bank Group.