ABSTRACT
This paper analyses the determinants of the tourism demand, following an approach which innovates in a) using spatial models applying a well-founded specification selection process b) exploring the effects of two types of institutions, corruption and Rule of Law, and c) assessing the spillover effects of the COVID-19 shock on the international tourism demand in Portugal and Spain. The study is conducted using a sample of 109 countries for the period 1995-2018. It shows that tourism shocks in neighbouring countries, and particularly the coronavirus pandemic, significantly affect tourism demand in the host country with the same sign as the shock itself, and that the Rule of Law of the destination country influences positively on tourists' inflow. Corruption does not seem to have significant effects on the tourist demand of the host country. From these results, we derive that national governments should provide fair and transparent legal frameworks that generate security for potential tourists. Moreover, national authorities of neighbouring countries are advised to cooperate in both promoting tourism and adopting coordinated actions against negative external shocks that hit them symmetrically, such as COVID-19.