Journal Article

Institutional Quality and International Trade

Andrei A. Levchenko

in The Review of Economic Studies

Published on behalf of Review of Economic Studies Ltd

Volume 74, issue 3, pages 791-819
Published in print July 2007 | ISSN: 0034-6527
Published online July 2007 | e-ISSN: 1467-937X | DOI:
Institutional Quality and International Trade

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  • International Trade
  • Economic Development


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Institutions—quality of contract enforcement, property rights, shareholder protection, and the like—have received a great deal of attention in recent years. Yet trade theory has not considered the implications of institutional differences, beyond treating them simply as different technologies or taxes. The purpose of this paper is twofold. First, we propose a simple model of international trade in which institutional differences are modelled within the framework of incomplete contracts. We show that doing so reverses many of the conclusions obtained by equating institutions with productivity. Institutional differences as a source of comparative advantage imply, among other things, that the less developed country may not gain from trade and factor prices may actually diverge as a result of trade. Second, we test empirically whether institutions act as a source of trade, using data on U.S. imports disaggregated by country and industry. The empirical results provide evidence of “institutional content of trade”: institutional differences are an important determinant of trade flows.

Keywords: F11; F14; O17; O19

Journal Article.  13383 words.  Illustrated.

Subjects: International Trade ; Economic Development

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