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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.

Suggested Citation

  • Andrei A. Levchenko, 2013. "International Trade and Institutional Change," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 29(5), pages 1145-1181, October.
    • Handle: RePEc:oup:jleorg:v:29:y:2013:i:5:p:1145-1181
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    File URL: http://hdl.handle.net/10.1093/jleo/ews008
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    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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