Transaction Costs of Corruption in Pure Theory of International Trade

This chapter introduces transaction cost associated with corruption and institutional complexities in standard competitive trade models. Using a textbook kind competitive Ricardian model, I check if any change in institutional factor reflecting corruption-related intermediation may lead to apparently surprising outcome. In doing so, I use the idea of finite change in international trade theory to argue how an increase in the degree of corruption-related intermediation cost eventually removes corruption from the system. Then I move to the HOSV set up and explain that even if we use symmetric iceberg type transaction costs, this may generate relative price effects and prove that higher costs in labor-abundant countries will restrict the volume of world trade and conversely for the capital-abundant nation. Asymmetric trading cost between goods may have paradoxical output effects. Interestingly, it is observed that a relatively capital-abundant country will be worse off with increasing transaction costs of corruption, whereas the labor-abundant country may gain from further increases in such cost. H-O nugget is taken up at the end to inspect if such transaction costs can influence wage disparity between skilled and unskilled workers. I argue in terms of a general equilibrium model where both skilled and unskilled workers participate in corruption.