section by presenting further robustness checks in Subsection 5.3.

# **5.1 Results from Disaggregated Bilateral Trade Data**

**Production versus Trade-specific Effect** Better contracting institutions may influence not only exports, but also domestic production. We start by highlighting the importance of distinguishing between two effects of institutions: (i) the effect on domestic production, and (ii) the trade-specific effect – i.e., the effect on export pattern over and above the effect on domestic production pattern. One way to understand the difference between the two is to think of a policy action implemented with the intention of making contracts more secure. This would reduce total trading costs thereby making it easier for non-exporting firms to embark on exporting and for those already exporting to scale up their operation. In addition, this policy action would also influence the incentive of incumbent firms to restructure their production and of potential firms to be attracted (more) towards a particular sector. While the latter will also ultimately affect the pattern of trade, it is the former effect that reflects the direct and immediate trade-specific effect of the policy reform.

As the OLS estimate in the first column of Table 1 shows, the coefficient of the interaction term _Rule of Law × Institutional-Intensity_ , which captures the effect of institutions on the pattern of trade, is 0.231 and statistically highly significant. However, part of this effect could represent the effect of improved institutions on domestic production which could subsequently boost exports. Column 2 isolates the differential trade-specific effect by controlling for the production effect using the (log) number of establishments. Comparing the two coefficients, it is clear that the effect of institutions on the pattern of export – over and above enhancing domestic production – makes up about 84 percent (= (0.193/0.231)x100%) of what we would have inferred without controlling for the effect on domestic production. This corresponds to an overstatement of the effect by around 20 percent (= ((0.2310.193)/0.193)x100%).

Columns 3 and 4 (of Table 1) repeat the exercise by controlling for the economic sizes of the exporter and the importer, captured by their respective Gross Domestic Products (GDPE and GDPI). While the gap between the two estimates gets somewhat narrower, failing to control for the effect on domestic production still overstates the effect of institutions on the pattern of trade; this time by about 19 percent (= ((0.228-0.192)/0.192)x100%). While controlling for more factors, as in Columns 5 and 6, reduces the gap between the two estimates remarkably, the wedge between the two still persists – no matter the number of controls. Hence, given the importance of distinguishing between the two effects that the results in Table 1 lend support to, we include the (log) number of establishments in all our subsequent regressions.

**Selection into Exporting** To identify the effect of institutions on the export pattern and to disentangle the influence on the extensive margin from that on the intensive, we need to estimate a selection model that explains what influences the probability that country _j_ exports a positive value of a product in sector _s_ to another country _i_ in year _t_ . Table 2 presents regression results of this exercise. Each column in the table includes a variable unique to the selection equation – a variable that determines the decision to export but not the amount of export. Following the literature, we use the number of days required for starting a new business ( _Days_ ) in the baseline specification (Column 1). The result

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