Trade,trust and the rule of law |
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| Institution: | 1. University of Groningen, The Netherlands;2. Dutch Central Bank, The Netherlands;3. CESifo, Munich, Germany;1. Department of Business Administration, University of Zurich, Plattenstrasse 14, 8032 Zurich, Switzerland;2. School of Business, Lucerne University of Applied Sciences and Arts, Zentralstrasse 9, 6002 Lucerne, Switzerland;1. CREST-ENSAE, 15 boulevard Gabriel Peri, 92245 Malakoff cedex, France;2. CESIfo, Munich, Germany;3. CEPR, London, UK;4. University of Lille 1, EQUIPPE, Cité Scientifique, 59650 Villeneuve-d''Ascq, France;5. CRED, Paris Center for Law and Economics, 26 rue des Fossés Saint-Jacques, 75005 Paris, France;1. Department of Economics, Illinois State University, Normal, IL 61790-4200, USA;2. Department of Economics, University of Akron, Akron, OH 44325, USA |
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| Abstract: | Well-functioning institutions, both formal (i.e. rule of law) and informal (i.e. trust), facilitate economic exchange. To investigate the nature of the relationship between formal and informal institutions, we analyze bilateral trade patterns in a sample of 16 European countries between 1996–2009. Our results show that trust and rule of law are substitutes, as the positive effect of trust on trade is conditional on the quality of the rule of law. When the rule of law of the importing country increases relative to that of the exporter, the effect of trust on trade decreases. The decline in the effect of trust on trade is less for importers than for exporters, a result that can be attributed to the risk of non-payment that exporters run. |
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