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Trade, Inequality, and the Political Economy of Institutions

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  • Andrei A. Levchenko
  • Quý Toà n Ão

Abstract

We analyze the relationship between international trade and the quality of economic institutions, such as contract enforcement, rule of law, and property rights. In our model, firms differ in their preferences for institutional quality, which is determined endogenously in a political economy framework. We show that trade opening can worsen institutions when it increases the political power of a small elite of large exporters who prefer to maintain bad institutions. The detrimental effect of trade on institutions is most likely to occur when a small country captures a sufficiently large share of world exports in sectors characterized by economic profits.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 06/56.

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Length: 54
Date of creation: 01 Feb 2006
Date of revision:
Handle: RePEc:imf:imfwpa:06/56

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Related research

Keywords: Financial institutions; political power; political economy; institutional quality; trade opening; competition effect; international trade; domestic market; trade regimes; world trade; export markets; domestic production; trade regime; domestic firms; market equilibrium; free entry; national government; institutional change; government policy; trade openness; world market; barriers to entry; export market; impact of trade; external finance; trade expansion; domestic demand; trading partner; factor markets; import license; share of world exports; domestic economy; world economy; free labor; trade integration; imperfect competition; trading partners; exporting countries; world prices; world exports; trade costs; perfect competition; trading blocs; income distribution; factor endowments; income differences; quantitative restrictions; foreign trade; preferential access; export opportunities; political systems; food industry; domestic producers; poverty alleviation; free trade;

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References

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