Trade, Inequality, and the Political Economy of Institutions
February 1, 2006
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Summary
We analyze the relationship between international trade and the quality of economic institutions, such as contract enforcement, rule of law, and property rights. In our model, firms differ in their preferences for institutional quality, which is determined endogenously in a political economy framework. We show that trade opening can worsen institutions when it increases the political power of a small elite of large exporters who 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.
Subject: Agricultural commodities, Competition, Exports, Labor, Political economy
Keywords: fixed cost, WP
Pages:
54
Volume:
2006
DOI:
Issue:
056
Series:
Working Paper No. 2006/056
Stock No:
WPIEA2006056
ISBN:
9781451863161
ISSN:
1018-5941
