Institutional Similarity and Economic Integration

Abstract

While there is evidence that politics matter for the formation of trade blocs, the impact on economic integration of institutional similarity among countries has been given short shrift in the previous literature. I posit that institutional similarity among countries constitutes an important factor in the formation of preferential trade agreements by raising the quantity and the quality of information available to potential trade bloc member states. Specifically, institutional similarity decreases transaction costs, increasing trust between states in the bargaining phase, and dampens adjustment costs, helping states to make credible commitments in the fulfillment phase. Using a battery of econometric tools, this study quantitatively tests the impact of two aspects of institutional similarity: political accountability and political transparency. The dataset used herein covers 167 countries from 1990 to 2005.