Market size, International Trade and Institutional Quality

15:00-16:30, Monday, June 1, 2020

Tencent Meeting (Meeting ID: 502 834 082)

Dr. Xuan LUO is a postdoctoral research fellow in the department of Economics and Political Science at INSEAD. He received his PHD in Economics from Singapore Management University in 2018. His primary research interest is in international economics, with a special focus on the impact of international trade on institutional quality. His research also encompasses urban and regional economics and China's economy. At INSEAD, he is working with Professor Pushan DUTT and Assistant Professor Lin TIAN on trade learning and exporters' specialization patterns.

Institutions are arguably one of the most important determinants of economic development. This paper exploits the insight into the relation between geography and economies of scale and investigates how the market size and international trade affect institutional quality. Interestingly, we find that geography matters for one particular dimension of institution — rule of law — through the channel of market access, whereas such mechanism is not operating on many other dimensions of institution. We adopt an incomplete-contract approach to explain our findings. Market access and institution are complementary to each other, and benevolent governments have incentive to improve institutional quality when there are favourable shocks to market size or trade costs. The competition in institutional quality, an endogenous source of comparative advantages, also matters in a Nash-equilibrium sense. The institutional quality increases in trade-liberalized countries whereas those in the non-liberalized ones may deteriorate. Gains from trade can be amplified by 5-20% due to improvement in contracting institution. We also demonstrate that market access can drive the flying geese pattern of institutions across the globe.

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