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International Trade and Institutional Change

Author

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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.

Suggested Citation

  • Andrei A. Levchenko, 2008. "International Trade and Institutional Change," Working Papers 579, Research Seminar in International Economics, University of Michigan.
  • Handle: RePEc:mie:wpaper:579
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    File URL: http://www.fordschool.umich.edu/rsie/workingpapers/Papers576-600/r579.pdf
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    References listed on IDEAS

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    Cited by:

    1. Zissimos, Ben, 2017. "A theory of trade policy under dictatorship and democratization," Journal of International Economics, Elsevier, vol. 109(C), pages 85-101.
    2. Jeroen Puttevils, 2015. "‘Eating the bread out of their mouth’: Antwerp's export trade and generalized institutions, 1544–5," Economic History Review, Economic History Society, vol. 68(4), pages 1339-1364, November.
    3. 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.
    4. Kant, Chander, 2016. "Are institutions in developing countries malleable?," Journal of Policy Modeling, Elsevier, vol. 38(2), pages 272-289.
    5. Marianna Belloc & Samuel Bowles, 2009. "International Trade, Factor Mobility and the Persistence of Cultural-Institutional Diversity," UMASS Amherst Economics Working Papers 2009-08, University of Massachusetts Amherst, Department of Economics.
    6. 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.
    7. Nunn, Nathan & Trefler, Daniel, 2014. "Domestic Institutions as a Source of Comparative Advantage," Handbook of International Economics, Elsevier.
    8. repec:bla:sajeco:v:85:y:2017:i:3:p:368-385 is not listed on IDEAS
    9. Dong, Zhiqiang & Zhang, Yongjing, 2016. "Accumulated social capital, institutional quality, and economic performance: Evidence from China," Economic Systems, Elsevier, vol. 40(2), pages 206-219.
    10. Martin Strieborny & Madina Kukenova, 2016. "Investment in Relationship-Specific Assets: Does Finance Matter?," Review of Finance, European Finance Association, vol. 20(4), pages 1487-1515.
    11. repec:gam:jsusta:v:10:y:2018:i:11:p:4173-:d:182419 is not listed on IDEAS
    12. Strieborny, Martin, 2013. "Suppliers, Investors, and Equity Market Liberalizations," Working Papers 2013:12, Lund University, Department of Economics.
    13. Wen-Bin Chuang & Hui-lin Lin & Chien-Wei Wu, 2015. "Does Institutional Quality Strengthen The Positive Influence of Offshore R&D Strategy on the Firm Productivity?," Asian Economic and Financial Review, Asian Economic and Social Society, vol. 5(2), pages 279-294, February.
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    17. Kim, Dong-Hyeon & Lin, Shu-Chin & Suen, Yu-Bo, 2016. "Trade, growth and growth volatility: New panel evidence," International Review of Economics & Finance, Elsevier, vol. 45(C), pages 384-399.
    18. Stephan Haggard & Marcus Noland, 2018. "Networks, Trust and Trade: The Microeconomics of China–North Korea Integration," Asian Economic Journal, East Asian Economic Association, vol. 32(3), pages 277-299, September.
    19. repec:spr:weltar:v:153:y:2017:i:4:d:10.1007_s10290-017-0288-y is not listed on IDEAS
    20. Horváth, Roman & Zeynalov, Ayaz, 2016. "Natural resources, manufacturing and institutions in post-Soviet countries," Resources Policy, Elsevier, vol. 50(C), pages 141-148.
    21. Yang Jiao & Shang-Jin Wei, 2017. "Intrinsic Openness and Endogenous Institutional Quality," NBER Working Papers 24052, National Bureau of Economic Research, Inc.
    22. Michiel Gerritse, 2015. "Does trade cause long-run development? Theory and evidence from countries behind the Suez channel," ERSA conference papers ersa15p1100, European Regional Science Association.
    23. 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.
    24. Busse, Matthias & Hoekstra, Ruth & Osei, Robert D., 2013. "The Effectiveness of Aid in Improving Regulations: Empirical evidence and the drivers of change in Rwanda," IEE Working Papers 198, Ruhr University Bochum, Institute of Development Research and Development Policy (IEE).
    25. Andreas Bergh & Irina Mirkina & Therese Nilsson, 2014. "Globalization and Institutional Quality-A Panel Data Analysis," Oxford Development Studies, Taylor & Francis Journals, vol. 42(3), pages 365-394, September.

    More about this item

    Keywords

    trade; institutional change;

    JEL classification:

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

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