Journal Article

International Trade and Institutional Change

Andrei A. Levchenko

in The Journal of Law, Economics, and Organization

Volume 29, issue 5, pages 1145-1181
Published in print October 2013 | ISSN: 8756-6222
Published online April 2012 | e-ISSN: 1465-7341 | DOI: https://dx.doi.org/10.1093/jleo/ews008
International Trade and Institutional Change

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This article analyzes the impact of international trade on the quality of institutions, such as contract enforcement or property rights. It presents a model in which imperfect institutions create rents for some parties within the economy and are a source of comparative advantage in trade. Institutional quality is determined as an equilibrium of a political economy game. When countries share the same technology, there is a “race to the top” in institutional quality: both trade partners are forced to improve institutions after opening. On the other hand, domestic institutions will not improve in either country when one of the countries has a strong enough technological comparative advantage in the institutionally intensive good. While time series results are not statistically significant, a related cross-sectional prediction of the model is consistent with the data. Countries whose exogenous geographical characteristics predispose them to exporting in institutionally intensive sectors exhibit significantly higher institutional quality.

Keywords: F15; P45; P48

Journal Article.  13706 words.  Illustrated.

Subjects: Other Economic Systems ; International Trade

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