Working Paper: CEPR ID: DP8809
Authors: Luis Araujo; Giordano Mion; Emanuel Ornelas
Abstract: We study the role of contract enforcement in shaping the dynamics of international trade at the firm level. We develop a theoretical model to describe how agents build reputations to overcome the problems created by weak enforcement of international contracts. We find that, all else equal, exporters start their activities with higher volumes and remain as exporters for a longer period in countries with better contracting institutions. However, conditional on survival, the growth rate of a firm's exports to a country decreases with the quality of the country's institutions. We test these predictions using a rich panel of Belgium exporting firms from 1995 to 2008 to every country in the world. We adopt two alternative empirical strategies. In one specification we use firm-year fixed effects to control for time-varying firm-specific characteristics. Alternatively, we model selection more explicitly with a two-step Heckman procedure using
Keywords: contract enforcement; contracting institutions; firm dynamics; firm exports
JEL Codes: F10; F12; L14
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Institutional quality (I24) | Initial export volumes (F10) |
| Institutional quality (I24) | Longevity of export partnerships (F10) |
| Survival in foreign markets (F23) | Growth rate of exports (F10) |
| Institutional quality (I24) | Growth rate of exports (F10) |