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International Trade and Institutional Change

  • Andrei A. Levchenko

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
Date of revision:
Publication status: published as Andrei A. Levchenko, 2013. "International Trade and Institutional Change," Journal of Law, Economics and Organization, Oxford University Press, vol. 29(5), pages 1145-1181, October.
Handle: RePEc:nbr:nberwo:17675
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