suppliers affect the trade pattern. Levchenko (2007) argues that industries that rely heavily on a larger number of input suppliers are more vulnerable to holdup problems and are hence more sensitive to imperfect institutions. A substantial body of literature that followed these seminal papers confirms the role of institutions in explaining international trade patterns (see Nunn & Trefler (2014) for detailed review of the empirical literature).

Notwithstanding the growing body of evidence documenting the role of contracting institutions as a source of comparative advantage, our understanding of the underlying mechanisms is still rather limited. There are many potential ways that domestic institutions could affect trade patterns. For example, weak contract enforcement may simply affect firms’ decision to enter into foreign markets by increasing the cost of relationship-specific intermediate inputs - increasing the threshold of exporting (extensive margin). In addition to restricting export entry, weak contract enforcement can also distort the level of firm exports as firms need efficient and cheap supply of intermediate inputs to expand their export sales (intensive margin). Such institutional deficiencies could also affect the survival of firms in foreign markets since new exporting firms could later discover that the cost of contract enforcement makes an important component of profitability calculations, as a result of which some of them may have to exit sooner than one would expect.

To understand the operating forces and underlying mechanisms, one needs a micro-founded theoretical framework and cross-country firm-level data. Manova (2013) developed a heterogeneous-firm model by building upon Melitz (2003) to explore the mechanisms through which credit constraints affect international trade patterns. She finds that credit constraints substantially reduce exports both at the extensive margin and at the intensive margin. Our study follows closely the work of Manova (2013) but differs at least in two main respects. First, while the author focuses on financial frictions, we take interest in how limited contract enforcement affects different industries based on their contract-intensity. Second, we explore the trade effect by utilizing unique harmonized firm-level data that are ideally suited to studying these operating forces and mechanisms. Thus, this paper improves the understanding of the relationship between domestic institutions and the trade pattern at the firm level.

In another related contribution, Kim et al. (2017) have disentangled the effect of institutions on trade into the intensive and extensive margins. Kim et al. (2017, p. 4) assert that “The decision to trade at all is political ... [whereas the] decision of how much to trade, if one trades at all, is economic.” Their estimates also show that the influence of (political) institutions on trade is stronger and more robust along the extensive margin than the intensive margin. However, while they focus on the quality of institutions in the partner countries, our focus is on the effects of exporters’ domestic institutions.

Our paper is also related to the nascent literature that explores the effects of institutions on trade patterns and dynamics using firm-level data. Ma et al. (2010), using data from 28 countries taken from the World Bank’s Enterprise Surveys, show that firms located in areas with better institutional quality export goods that are more contract intensive. Araujo et al. (2016) develop a model of trade with imperfect contract enforcement to study how the dynamics of exporting firms depends on the strength of the contracting institutions of the destination countries. Using panel data of Belgian firms, they find that producers selling to countries with good contracting institutions start their activities there with higher volumes. They also document that the quality of contracting institutions in the destination markets enhances exporter survival rate. A related paper by Aeberhardt et al. (2014), using firmlevel data from France, documents that better institutional quality improves the persistence of trade 4