Politics, Institutions, and Trade

June 2016
with In Song Kim and Marc Ratkovic; Working Paper

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A vast literature on international trade predicts that political institutions affect both the choice of trade partners (extensive margin) and trade volumes (intensive margin). Yet most analyses ignore the former margin, while their estimates of the latter neglect nontrading pairs and thereby suffer from selection bias. Also, the data on individual features of multifaceted political institutions are highly collinear, which impedes estimating their separate effects. We develop and implement a two-stage Bayesian LASSO estimator that lets us use detailed measures of institutional features, with highly disaggregated product-level trade flows encompassing over one hundred and thirty countries over a half century. We find that political institutions matter more for the extensive than the intensive margin, and that democratic political institutions are not always trade promoting; although trade appears to be fostered by political stability, other features of democracies – party competition and open executive recruitment – inhibit trade.