CORRUPTION AND TRADE IN GENERAL EQUILIBRIUM*

We use the Heckscher – Ohlin – Samuelson- Vanek (HOSV) model of international trade to find out a link between corruption and the pattern of trade, not just its effect on the volume of trade, the usual point of query in the existing literature. We prove that greater corruption in labor-abundant countries will restrict the volume of world trade by working against the factor endowment bias. This is caused by a class of intermediaries who are engaged in mitigating the transaction cost of corruption. Corruption in capital-abundant countries reinforces the factor endowment bias and therefore should promote trade. For countries with similar factor endowments, relatively corrupt economy will export capital-intensive goods. We show that corruption does not necessarily reduce global volume of trade. Relatively capital-abundant country will be worse off with increasing degree of corruption at home and abroad, whereas the labor-abundant country, once engaged in trade may gain from corruption