Chinese Academy of Social Sciences
Better contracting environment and judicial quality in a country not only constitute a comparative advantage in industries intensively using customized input, but also induce quality upgrading of domestic varieties and tougher domestic competition, affecting the quality compositions of trade in those industries. To characterize these effects, we develop a Ricardian model that accounts for relationship-speciﬁcity ofcustomizedinputandproductqualitychoice. Usinglegaloriginastheinstrument for judicial quality, we empirically conﬁrm the model’s implications of country-level judicial quality for trade pattern, price, and quality across industries and products. We then propose new welfare formulas highlighting the domestic competition and quality composition effects and show that domestic shocks are critical in driving relative welfare changes across countries.
Keywords: Judicial quality, Contracts, Customized input, Quality, Trade margins