A Domino Theory of Regionalism Revisited in an Era of Deep Integration: The Role of Homogeneity/Heterogeneity in Institutions

Abstract

This paper proposes that country-pairs sharing homogeneity in domestic institutions tend to sign preferential trade agreements (PTAs) interdependently, and such an interdependence effect decreases with institutional differential. Using spatial econometrics, we take democracy and economic freedom as fundamental components of the spatial weight matrix. The baseline results support our hypothesis from both the panel data over 1996 to 2017 through a probit model and the cross-sectional data through a spatial autoregressive probit model. We also employ a compound spatial weight matrix to account for the institutional differential and geographical distance simultaneously, which confirms the role of domestic institutions in the evolution of PTAs. Our findings are robust to the correction of potential endogeneity in the spatial weight matrix, and we provide not only novel evidence for the spatial effect of institutional differential on the domino-like spread of PTAs, but also some insights on the relationship between regionalism and multilateralism.