Abstract
This research study analyzes the effects of similarities in economic size and institutional level on bilateral trade. It is interested in whether similarities in country size and at the institutional level encourage enlarging volumes of bilateral trade between countries.
Using panel data of the bilateral trade of Azerbaijan with 50 different countries from 1995 to 2012, estimating by random and fixed effects, as well as the Poisson Pseudo Maximum Likelihood (PPML), the study finds that similarity of income size is necessary for increasing bilateral trade across countries. The main finding is that high quality rule of law and more control of corruption boost confidence in international trade, therefore, reliable countries tend to trade more between each other, and less with unreliable countries.
Unreliable countries trade more with each other, and less with reliable ones. A large divergence in institutional quality performance reduces bilateral trade across countries.
The results show that a long-term contract is one of the main indicator for natural resource exports; therefore distance might not have significant impact on bilateral trade relationships.