Judicial quality, input customisation, and trade margins: the role of product quality

¹Xiaomin Cui:Institute of World Economics and Politics

²YU Miaojie:National School of Development at Peking University

³Rui Zhang:FIND Centre at Aarhus University

Published:2022

Abstract:We study how the contracting environment affects the quality of trade. A better contracting environment not only induces specialisations in industries intensively using customised inputs, but also causes quality upgrading of domestic varieties and tougher competition in these industries. We incorporate these effects into a Ricardian model with customised input and product quality. Our model predicts that better judicial quality raises a country’s import prices and quality more in contract-intensive products, but has no impacts on its export prices or quality. We empirically confirm these predictions, and find that rising judicial quality is associated with increasing specialisations in contract-intensive industries.

Keywords:judicial quality, contracts, customised input, quality, trade margins

Classifification: F14, D23, L15