“Trade, Democracy and the Gravity Equation” by Miaojie YU
China Center for Economic Research Peking University
Democracy has scale and selection effects on trade. Importer’s democratization could change various trade barriers and hence affect trade flow (scale effect). Simultaneously, a democratic country would become a favorable exporter due to mutual ideological recognition and other concerns (selection effect). Thus, the net effect of democratization on trade remains an empirical issue. In this paper, we present a theoretical gravity model with democracy. Using a rich panel dataset while clearly controlling for the endogeneity of democracy, we find robust empirical evidence that democracy fosters trade significantly. Overall, democratization accounts for around 3% growing trade via scale effect and 8% via selection effect, ceteris paribus.