Contract Enforcement – And Its Impact on Bilateral Trade

Abstract: Today it is well known that institutions have a significant impact on growth and development. Less research has been investigating how institutions and in-stitutional quality affect trade. This thesis will specifically examine the effect contract enforcement has on bilateral trade. Secure property rights and con-tract enforcement are important for a country’s productivity and growth. The empirical analysis is based on the gravity model of trade to examine what explains the trade flows and more importantly what impact contract enforce-ment has on the bilateral trade. Instead of using one of the many existing sub-jective measurements of contract enforcement, an objective measurement called Contract-Intensive Money (CIM) is used. The results show that contract enforcement of the exporting country has a greater impact on exports than that of the importing country. As expected the institutionally dependent sector of machinery and transport equipment requires a higher level of contract enforcement than the standardized food sector. It implies that the exporting country will have a comparative advantage in export-ing complex products and import simple products. The results also indicates that the effect on exports is higher when there is development of a country’s poor contract enforcement rather than improvement in already high-quality contract enforcement in the partner country.