Trade, inequality, and the political economy of institutions

Quy-Toan Do and Andrei Levchenko

No 3836, Policy Research Working Paper Series from The World Bank

Abstract: The authors analyze the relationship between international trade and the quality of economic institutions such as contract enforcement, rule of law, or property rights. The literature on institutions has argued, both empirically and theoretically, that larger firms care less about good institutions and that higher inequality leads to worse institutions. Recent literature on international trade enables the authors to analyze economies with heterogeneous firms, and argue that trade opening leads to a reallocation of production in which large firms grow larger, while small firms become smaller or disappear. Combining these two strands of literature, the authors build a model that has two key features. First, preferences over institutional quality differ across firms and depend on firm size. Second, institutional quality is endogenously determined in a political economy framework. They show that trade opening can worsen institutions when it increases the political power of a small elite of large exporters that prefer to maintain bad institutions. The detrimental effect of trade on institutions is most likely to occur when a small country captures a sufficiently large share of world exports in sectors characterized by economic profits.

Keywords: Economic Theory&Research; Free Trade; Trade Law; Trade Policy; Trade and Services (search for similar items in EconPapers)
Date: 2006-02-01
New Economics Papers: this item is included in nep-dev, nep-int and nep-pol
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (9)

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Related works:
Journal Article: Trade, inequality, and the political economy of institutions (2009)
Working Paper: Trade, Inequality, and the Political Economy of Institutions (2006)
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