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International Trade and Institutional Change

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  • Andrei A. Levchenko

Abstract

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. The Author 2012. Published by Oxford University Press on behalf of Yale University. All rights reserved. For Permissions, please email: journals.permissions@oup.com, Oxford University Press.

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Bibliographic Info

Article provided by Oxford University Press in its journal The Journal of Law, Economics, & Organization.

Volume (Year): 29 (2013)
Issue (Month): 5 (October)
Pages: 1145-1181

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Handle: RePEc:oup:jleorg:v:29:y:2013:i:5:p:1145-1181

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Citations

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Cited by:
  1. Marianna Belloc & Samuel Bowles, 2010. "International Trade, Factor Mobility and the Persistence of Cultural-Institutional Diversity," Levine's Working Paper Archive 661465000000000051, David K. Levine.
  2. A'Hearn, Brian & Venables, Anthony J, 2011. "Internal Geography and External Trade: regional disparities in Italy, 1861-2011," CEPR Discussion Papers 8655, C.E.P.R. Discussion Papers.
  3. Do, Quy-Toan & Levchenko, Andrei A., 2009. "Trade, inequality, and the political economy of institutions," Journal of Economic Theory, Elsevier, vol. 144(4), pages 1489-1520, July.
  4. Strieborny Martin & Kukenova Madina, 2011. "Investment in Relationship-Specific Assets: Does Finance Matter ?," Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP) 11.01, Université de Lausanne, Faculté des HEC, DEEP.
  5. Strieborny, Martin, 2013. "Suppliers, Investors, and Equity Market Liberalizations," Working Papers 2013:12, Lund University, Department of Economics.
  6. Bergh, Andreas & Mirkina, Irina & Nilsson, Therese, 2013. "More Open – Better Governed? Evidence from High- and Low-income Countries," Working Paper Series 997, Research Institute of Industrial Economics.
  7. Marianna Belloc & Samuel Bowles, 2009. "International Trade, Factor Mobility and the Persistence of Cultural-Institutional Diversity," Working Papers 126, University of Rome La Sapienza, Department of Public Economics.
  8. Busse, Matthias & Hoekstra, Ruth & Osei, Robert, 2013. "The Effectiveness of Aid in Improving Regulations: Empirical evidence and the drivers of change in Rwanda," IEE Working Papers 198, Institut fuer Entwicklungsforschung und Entwicklungspolitik, Ruhr-Universitaet Bochum.
  9. Harald Badinger & Elisabeth Nindl, 2012. "Globalization, Inequality, and Corruption," Department of Economics Working Papers wuwp139, Vienna University of Economics, Department of Economics.
  10. Marcus Noland & Stephan Haggard, 2012. "Networks, Trust, and Trade: The Microeconomics of China–North Korea Integration," Working Paper Series WP12-8, Peterson Institute for International Economics.

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