Essays on Trade and Institutions

Park, Se Mi

Graduate Thesis Or Dissertation

Essays on Trade and Institutions Public Deposited

Analytics

Citations

Citeable URL: https://scholar.colorado.edu/concern/graduate_thesis_or_dissertations/4t64gn23m

Abstract

My dissertation examines the relationship between trade and institutions. Throughout the chapters of my dissertation, I consider three types of institutions: commercial arbitration regimes, formal institutions, and informal institutions. With an analytical modeling–, a computational modeling–, and an empirical approach, I offer new insights into trade and institutions. In the first essay, I provide a new framework for analyzing the effect of the quality of commercial arbitration regimes on sourcing patterns by introducing commercial arbitration into a two-country sourcing model. This model permits each country's final good producers to source a customized intermediate input domestically or globally. In this sourcing process, an intermediate input supplier might shave investment quality, and a final good producer might not pay in full for the investment. When such opportunistic behavior occurs, commercial arbitration may be invoked. Then, an arbitrator, who fully verifies investment value, determines awards. Nonetheless, opportunism is not removed due to the national arbitration regimes' imperfect support for enforcement of awards. I show that relative global sourcing increases (decrease) with each country's quality of international (domestic) commercial arbitration regimes. Relative global sourcing also falls with the degree to which relationship-specific transactions are required to produce the intermediate input. I provide empirical results supporting these predictions using a new measure I construct for the qualities of domestic and international commercial arbitration regimes. Indeed, this essay shows the significance of arbitration regimes in mitigating opportunism in sourcing, which, to date, has been overlooked. In the second essay, I shed light on the new role of international trade as a channel through which formal institutions of a country with rich informal institutions are developed. In my two-country, two-sector, two-factor computable general equilibrium model, formal institutions endogenously arise based on exogenously endowed informal institutions. This model carries a distinctive view that formal and informal institutions substitute for one another in generating institutional quality, expressed as a CES aggregate form of the two institutions. Institutional quality governs the productivity of the institutionally intensive sector with increasing returns to scale technology and the trade cost coming from imperfect contract enforcement. By comparative statics using simulations, I show that in open economies, formal institutions tend to increase with informal institutions through improving institutional comparative advantage and lowering the trade cost. This creates a contrast in that formal institutions fall with informal institutions under autarky. In the last essay, I provide new empirical evidence of the positive causal impact of institutional comparative advantage on the quality of institutions. These institutions are measured by the constraints on the behavior of policy makers, which correspond to formal institutions in the second essay. My cross-sectional analysis is based on a novel measure I construct for country-level institutional comparative advantage using the revealed comparative advantage index. To show the causal impact, variation in countries' population densities averaged over the past 30 years is utilized to provide exogenous variation in institutional comparative advantage between the countries. According to the instrumental variable estimates, a 1 percent rise in institutional comparative advantage leads to at least a 0.12-0.22 percent increase in institutional quality. This result shows the importance of exporting institutionally intensive goods in achieving high-quality institutions, which has received little attention in previous studies regarding trade and institutions.

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