Trade Under Uncertaintylegal institutions matter

Résumé

The relationship between a buyer from a developed country and a seller in a developing/transitioning economy is modeled focusing on the uncertainty embodied in the exchange. We show that institutions (specifically, well-developed legal systems) can help promote trade by offering reliable means of dispute resolution to buyers from developed economies. The main implication is tested with a panel data of exports from 107 developing and transitioning countries to 19 developed economies during the period 1982-97. We find support for the main hypothesis: countries with better legal institutions tend to export more to the developed countries, with generally larger effects for developing economies.