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\bigskip Institutions ... but which?
\\ \bigskip \large{The importance of the institutional setting in determining the trade between EU member
states.}}
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\author{\small{Joanna Tyrowicz}}

\date{\small{May $10^{th}$, 2004}}


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\begin{abstract}
Does trade stimulate GDP or is it the other way around? Not only
is the answer to this question crucial for policy implications,
but it also helps to understand the nature of wealth creation.
Number of studies confirmed that overall openness stimulates
economic growth allowing also to explain differences in income
levels (cfr. the works of Xavier Sala-i-Martin, Jeffrey Frankel
and Andrew K. Rose). However, although for obvious reasons trade
and GDP seem closely related, one was so far unable to
unambiguously ascertain, what the causality is. Nevertheless, it
should not discourage economists from analysing what stands behind
the international exchange of goods and services.

Analysing the trade patterns between European Union member states
seems particularly important for at least few reasons. Primarily,
EU is the most integrated regional trade block in the world giving
valuable experience of what such integration really means.
Observing which factors determine patterns of trade seems
therefore interesting.

Secondly, the extent to which EU member states trade with each
other affects the level of their integration. Thus, since the
asymmetry of external shock response might be marginalised by the
deeper integration, it might be crucial for reducing the risk of
EU collapse. For that reason, the determinants of trade are also
important for other integration levels, as common market and
political union.

In addition, the Intra-EU trade patterns� determinants are
particularly important for Poland and the other accessing
countries. The process of adjusting the institutions to the EU
standards, originated several years ago shall not be ended on the
accession day. Thus, understanding which institutions are
important for stimulating the Intra-EU exchange remains an
important issue.

In this paper we aim at identifying the institutional determinants
of trade. It has been argued frequently, that institutions,
geography are together important stimuli for economic growth.
Nevertheless, as shown by Dani Rodrik, some institutions can
influence GDP levels indirectly and in that respect, trade was
found to be an important transmission channel. Unlike other
studies, however, we intend to analyse which institutions exactly
can be considered essential.

The main goal of this paper is to identify and analyse main
institutional determinants of the intra-EU trade. We try to answer
the following question: \textbf{which institutions help two
companies to trade, despite their location?} In order to achieve
this, a gravity equation was constructed where formal and informal
institutions were explicitly specified. The reached conclusions
point to the importance of the legal framework, its quality as
well as the prevailing and intense home bias effect.
\end{abstract}

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