Does Institutional Similarity Necessarily Lead to Increased Bilateral Trade?

Abstract

To shed light on the question of whether or not institutional similarity always increases bilateral trade, we divide institutional quality into the low level (one standard deviation below the mean), medium level (in between minus one and one standard deviation from the mean), and high level (one standard deviation above the mean). By applying the system-GMM estimator, we found that the institutional similarity between the two countries has a trade-boosting effect, except in cases where one or both countries have low-institutional quality. These imply that measures to enhance institutional similarity must be accompanied by policies to promote institutional adaptability.