Corruption and Assortative Matching of Partners in International Trade

Although the effects of corruption on bilateral trade are well-documented, its impact on the composition of trading partners remains unexplored. In this paper, we argue that corruption in a country imposes asymmetric costs on its trading partners depending on their characteristics. Consequently, as the level of corruption in a country changes, its trade flows from some of its trading partners change more than others, depending on their characteristics, changing the composition of its trading partners. We focus on two characteristics of trading partners: (1) the level of corruption and (2) membership in the Organization for Economic Cooperation and Development Convention on Combating Bribery of Foreign Public Officials in International Business Transactions (OECD Convention). Using the gravity model, we find evidence of a negative assortative matching in international trade with respect to corruption. We find that corruption in a country is negatively associated with trade flows from high-corrupt countries and is positively associated with trade volume from signatories of the OECD convention. Our results suggest that future studies on this topic should consider controlling for institutional dissimilarities between the trading partners as it has implications for bilateral trade costs