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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.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 17675.

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Date of creation: Dec 2011
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Handle: RePEc:nbr:nberwo:17675

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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. Martin Strieborny & Madina Kukenova, 2011. "Investment in Relationship-Specific Assets: Does Finance Matter?," CESifo Working Paper Series 3349, CESifo Group Munich.
  3. 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.
  4. Brian A'Hearn & Anthony J. Venables, 2011. "Internal Geography and External Trade: regional disparities in Italy, 1861-2011," Quaderni di storia economica (Economic History Working Papers) 12, Bank of Italy, Economic Research and International Relations Area.
  5. Do, Quy-Toan & Levchenko, Andrei A., 2006. "Trade, inequality, and the political economy of institutions," Policy Research Working Paper Series 3836, The World Bank.
  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. 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.
  9. Harald Badinger & Elisabeth Nindl, 2012. "Globalization, Inequality, and Corruption," Department of Economics Working Papers wuwp139, Vienna University of Economics, Department of 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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