Institutional Quality and International Trade

IMF Working Paper No. 04/231

47 Pages Posted: 10 Jan 2005

See all articles by Andrei A. Levchenko

Andrei A. Levchenko

University of Michigan - Department of Economics; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 2 versions of this paper

Date Written: December 2004

Abstract

Institutions - quality of contract enforcement, property rights, shareholder protection, and the like - have received a great deal of attention in recent years. Yet trade theory has not considered the implications of institutional differences, beyond treating them simply as different technologies or taxes. The purpose of this paper is twofold. First, we propose a simple model of international trade in which institutional differences are modeled within the Grossman-Hart-Moore framework of contract incompleteness. We show that doing so reverses many of the conclusions obtained by equating institutions with productivity. Institutional differences imply, among other things, that the less developed country may not gain from trade, and factor prices may actually diverge as a result of trade. Second, we test empirically whether institutions act as a source of trade, using data on 1998 US imports disaggregated by country and industry. The empirical results provide evidence of institutional content of trade: institutional differences are an important determinant of trade flows.

Keywords: institutional differences, incomplete contracts, comparative advantage

JEL Classification: F11, F14, F16

Suggested Citation

Levchenko, Andrei A., Institutional Quality and International Trade (December 2004). IMF Working Paper No. 04/231, Available at SSRN: https://ssrn.com/abstract=646183 or http://dx.doi.org/10.2139/ssrn.646183

Andrei A. Levchenko (Contact Author)

University of Michigan - Department of Economics ( email )

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HOME PAGE: http://alevchenko.com

National Bureau of Economic Research (NBER) ( email )

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Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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