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International Trade and Institutional Change

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  • Andrei A. Levchenko

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 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: 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 country when one of the countries has a strong enough technological comparative advantage in the institutionally intensive good. We provide empirical evidence for a related cross-sectional prediction of the model. Countries whose exogenous geographical characteristics predispose them to exporting in institutionally intensive sectors exhibit significantly higher institutional quality.

Suggested Citation

  • Andrei A. Levchenko, 2011. "International Trade and Institutional Change," NBER Working Papers 17675, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:17675
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    More about this item

    JEL classification:

    • F15 - International Economics - - Trade - - - Economic Integration
    • P45 - Political Economy and Comparative Economic Systems - - Other Economic Systems - - - International Linkages
    • P48 - Political Economy and Comparative Economic Systems - - Other Economic Systems - - - Legal Institutions; Property Rights; Natural Resources; Energy; Environment; Regional Studies

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