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International Trade and Institutional Change

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  • Andrei A. Levchenko

    (University of Michigan)

Abstract

This paper analyzes the impact of international trade on the quality of institutions, such as contract enforcement, property rights, or investor protection. It presents a model in which institutional differences play two roles: they create rents for some parties within the economy, and they are a source of comparative advantage in trade. Institutional quality is determined in a Grossman-Helpman type lobbying game. When countries share the same technology, there is a race to the top" in institutional quality: irrespective of country characteristics, both trade partners are forced to improve institutions after opening. On the other hand, domestic institutions will not improve in either trading partner when one of the countries has a strong enough technological comparative advantage in the good that relies on institutions. We test these predictions in a sample of 141 countries, by extending the geography-based methodology of Frankel and Romer (1999). Countries whose exogenous geographical characteristics predispose them to exporting in institutionally intensive sectors enjoy significantly higher institutional quality.

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File URL: http://www.fordschool.umich.edu/rsie/workingpapers/Papers576-600/r579.pdf
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Bibliographic Info

Paper provided by Research Seminar in International Economics, University of Michigan in its series Working Papers with number 579.

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Length: 44 pages
Date of creation: Sep 2008
Date of revision:
Handle: RePEc:mie:wpaper:579

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Postal: ANN ARBOR MICHIGAN 48109
Web page: http://www.fordschool.umich.edu/rsie/
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Keywords: trade; institutional change;

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References

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Cited by:
  1. Strieborny, Martin, 2013. "Suppliers, Investors, and Equity Market Liberalizations," Working Papers 2013:12, Lund University, Department of Economics.
  2. Brian A'Hearn & Tony Venables, 2011. "Internal Geography and External Trade: regional disparities in Italy, 1861-2011," Economics Series Working Papers 578, University of Oxford, Department of Economics.
  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. 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.
  6. Harald Badinger & Elisabeth Nindl, 2012. "Globalization, Inequality, and Corruption," Department of Economics Working Papers wuwp139, Vienna University of Economics, Department of Economics.
  7. 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.
  8. 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.
  9. 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.
  10. 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.

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