Contents

The Impact of International Trade on Institutions and Infrastructure

Hochman, Gal / Tabakis, Chrysostomos / Zilberman, David

Abstract

We develop a theoretical model that explores the impact of international trade on both institutions and infrastructure, while explicitly addressing the correlation between institutional quality and infrastructure investment. We show that trade leads to higher infrastructure investment so that domestic firms become more productive and can, thus, better compete internationally. However, infrastructure investment also has a detrimental effect on firms, as it is financed through firm taxation. As a result, when some firms have stronger political ties than others, trade leads to weaker institutions and more cronyism as the government attempts to lower the tax burden on the politically connected firms. Moreover, we show that trade with a partner characterized by high aggregate firm productivity or low firm fixed costs induces a country to invest more heavily in both its infrastructure and its institutional framework.

Issue Date
2013-02
Publisher
ACADEMIC PRESS INC ELSEVIER SCIENCE
Keywords
Cronyism; Infrastructure; Institutions; International trade; Politically connected firms
DOI
10.1016/j.jce.2012.07.001
Journal Title
Journal of Comparative Economics
Start Page
126
End Page
140
ISSN
0147-5967
Language
English
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