The paper provides an empirical analysis of the importance of infrastructure for bilateral trade flows using an augmented gravity model of trade. The estimates suggest that potential gains from improvements in infrastructure are large and far exceed the effects of lowering tariff barriers. Moreover, the effect of improving hard infrastructure on trade flows in a particular country increases with the quality of infrastructure of trading partners. Similar complementarity is observed for control of corruption, with a large asymmetry of effects, where institutions in the destination market seem to be considerably more important.
Download