Trade, Inequality, and the Political Economy of Institutions

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...

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Main Authors:	Do, Quy-Toan, Levchenko, Andrei A.
Format:	Policy Research Working Paper
Language:	English
Published:	World Bank, Washington, DC 2012
Subjects:	ABSOLUTE VALUE BARRIERS TO ENTRY BRIBERY CENTRAL AMERICA CENTRAL AMERICAN COMPETITION EFFECT CONSUMER PREFERENCES DEMAND CURVE DISTRIBUTION OF WEALTH DOMESTIC DEMAND DOMESTIC FIRMS DOMESTIC MARKET DOMESTIC PRODUCTION DOMESTIC SALES ECONOMIC PERFORMANCE ECONOMIC SIZE ENTRY BARRIERS EQUILIBRIUM EXPORT MARKET EXPORT MARKETS EXPORT PROFITS EXPORTERS EXPORTING COUNTRIES EXPORTS EXTERNAL FINANCE FACTOR MARKETS FIXED COST FIXED COSTS FOREIGN COMPETITION FOREIGN FIRMS FOREIGN MARKET FOREIGN MARKETS FOREIGN TRADE FREE ENTRY GDP IMPORT LICENSE IMPORTS INCOME INCREASED COMPETITION INTERNATIONAL TRADE MARGINAL BENEFITS MARGINAL COST MARGINAL COST OF PRODUCTION MONOPOLISTIC COMPETITION NATURAL RESOURCES OPENNESS POLICY RESEARCH POLITICAL ECONOMY POLITICAL SYSTEMS PRODUCTIVITY PROPERTY RIGHTS QUANTITATIVE RESTRICTIONS RENT SEEKING RULE OF LAW SHARE OF WORLD EXPORTS SPECIALIZATION TRADE COSTS TRADE EXPANSION TRADE OPENING TRADE OPENNESS TRADE POLICY TRADE REGIME TRADE REGIMES TRADING PARTNERS UTILITY FUNCTION UTILITY MAXIMIZATION VOTERS WAGES WEALTH WEST EUROPEAN WORLD TRADE
Online Access:	http://documents.worldbank.org/curated/en/2006/02/6559639/trade-inequality-political-economy-institutions http://hdl.handle.net/10986/8778

id	okr-10986-8778
recordtype	oai_dc
spelling	okr-10986-87782021-04-23T14:02:40Z Trade, Inequality, and the Political Economy of Institutions Do, Quy-Toan Levchenko, Andrei A. ABSOLUTE VALUE BARRIERS TO ENTRY BRIBERY CENTRAL AMERICA CENTRAL AMERICAN COMPETITION EFFECT CONSUMER PREFERENCES DEMAND CURVE DISTRIBUTION OF WEALTH DOMESTIC DEMAND DOMESTIC FIRMS DOMESTIC MARKET DOMESTIC PRODUCTION DOMESTIC SALES ECONOMIC PERFORMANCE ECONOMIC SIZE ENTRY BARRIERS EQUILIBRIUM EXPORT MARKET EXPORT MARKETS EXPORT PROFITS EXPORTERS EXPORTING COUNTRIES EXPORTS EXTERNAL FINANCE FACTOR MARKETS FIXED COST FIXED COSTS FOREIGN COMPETITION FOREIGN FIRMS FOREIGN MARKET FOREIGN MARKETS FOREIGN TRADE FREE ENTRY GDP IMPORT LICENSE IMPORTS INCOME INCREASED COMPETITION INTERNATIONAL TRADE MARGINAL BENEFITS MARGINAL COST MARGINAL COST OF PRODUCTION MONOPOLISTIC COMPETITION NATURAL RESOURCES OPENNESS POLICY RESEARCH POLITICAL ECONOMY POLITICAL SYSTEMS PRODUCTIVITY PROPERTY RIGHTS QUANTITATIVE RESTRICTIONS RENT SEEKING RULE OF LAW SHARE OF WORLD EXPORTS SPECIALIZATION TRADE COSTS TRADE EXPANSION TRADE OPENING TRADE OPENNESS TRADE POLICY TRADE REGIME TRADE REGIMES TRADING PARTNERS UTILITY FUNCTION UTILITY MAXIMIZATION VOTERS WAGES WEALTH WEST EUROPEAN WORLD TRADE 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. 2012-06-22T15:18:57Z 2012-06-22T15:18:57Z 2006-02 http://documents.worldbank.org/curated/en/2006/02/6559639/trade-inequality-political-economy-institutions http://hdl.handle.net/10986/8778 English Policy Research Working Paper; No. 3836 CC BY 3.0 IGO http://creativecommons.org/licenses/by/3.0/igo/ World Bank World Bank, Washington, DC Publications & Research :: Policy Research Working Paper Publications & Research
repository_type	Digital Repository
institution_category	Foreign Institution
institution	Digital Repositories
building	World Bank Open Knowledge Repository
collection	World Bank
language	English
topic	ABSOLUTE VALUE BARRIERS TO ENTRY BRIBERY CENTRAL AMERICA CENTRAL AMERICAN COMPETITION EFFECT CONSUMER PREFERENCES DEMAND CURVE DISTRIBUTION OF WEALTH DOMESTIC DEMAND DOMESTIC FIRMS DOMESTIC MARKET DOMESTIC PRODUCTION DOMESTIC SALES ECONOMIC PERFORMANCE ECONOMIC SIZE ENTRY BARRIERS EQUILIBRIUM EXPORT MARKET EXPORT MARKETS EXPORT PROFITS EXPORTERS EXPORTING COUNTRIES EXPORTS EXTERNAL FINANCE FACTOR MARKETS FIXED COST FIXED COSTS FOREIGN COMPETITION FOREIGN FIRMS FOREIGN MARKET FOREIGN MARKETS FOREIGN TRADE FREE ENTRY GDP IMPORT LICENSE IMPORTS INCOME INCREASED COMPETITION INTERNATIONAL TRADE MARGINAL BENEFITS MARGINAL COST MARGINAL COST OF PRODUCTION MONOPOLISTIC COMPETITION NATURAL RESOURCES OPENNESS POLICY RESEARCH POLITICAL ECONOMY POLITICAL SYSTEMS PRODUCTIVITY PROPERTY RIGHTS QUANTITATIVE RESTRICTIONS RENT SEEKING RULE OF LAW SHARE OF WORLD EXPORTS SPECIALIZATION TRADE COSTS TRADE EXPANSION TRADE OPENING TRADE OPENNESS TRADE POLICY TRADE REGIME TRADE REGIMES TRADING PARTNERS UTILITY FUNCTION UTILITY MAXIMIZATION VOTERS WAGES WEALTH WEST EUROPEAN WORLD TRADE
spellingShingle	ABSOLUTE VALUE BARRIERS TO ENTRY BRIBERY CENTRAL AMERICA CENTRAL AMERICAN COMPETITION EFFECT CONSUMER PREFERENCES DEMAND CURVE DISTRIBUTION OF WEALTH DOMESTIC DEMAND DOMESTIC FIRMS DOMESTIC MARKET DOMESTIC PRODUCTION DOMESTIC SALES ECONOMIC PERFORMANCE ECONOMIC SIZE ENTRY BARRIERS EQUILIBRIUM EXPORT MARKET EXPORT MARKETS EXPORT PROFITS EXPORTERS EXPORTING COUNTRIES EXPORTS EXTERNAL FINANCE FACTOR MARKETS FIXED COST FIXED COSTS FOREIGN COMPETITION FOREIGN FIRMS FOREIGN MARKET FOREIGN MARKETS FOREIGN TRADE FREE ENTRY GDP IMPORT LICENSE IMPORTS INCOME INCREASED COMPETITION INTERNATIONAL TRADE MARGINAL BENEFITS MARGINAL COST MARGINAL COST OF PRODUCTION MONOPOLISTIC COMPETITION NATURAL RESOURCES OPENNESS POLICY RESEARCH POLITICAL ECONOMY POLITICAL SYSTEMS PRODUCTIVITY PROPERTY RIGHTS QUANTITATIVE RESTRICTIONS RENT SEEKING RULE OF LAW SHARE OF WORLD EXPORTS SPECIALIZATION TRADE COSTS TRADE EXPANSION TRADE OPENING TRADE OPENNESS TRADE POLICY TRADE REGIME TRADE REGIMES TRADING PARTNERS UTILITY FUNCTION UTILITY MAXIMIZATION VOTERS WAGES WEALTH WEST EUROPEAN WORLD TRADE Do, Quy-Toan Levchenko, Andrei A. Trade, Inequality, and the Political Economy of Institutions
relation	Policy Research Working Paper; No. 3836
description	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.
format	Publications & Research :: Policy Research Working Paper
author	Do, Quy-Toan Levchenko, Andrei A.
author_facet	Do, Quy-Toan Levchenko, Andrei A.
author_sort	Do, Quy-Toan
title	Trade, Inequality, and the Political Economy of Institutions
title_short	Trade, Inequality, and the Political Economy of Institutions
title_full	Trade, Inequality, and the Political Economy of Institutions
title_fullStr	Trade, Inequality, and the Political Economy of Institutions
title_full_unstemmed	Trade, Inequality, and the Political Economy of Institutions
title_sort	trade, inequality, and the political economy of institutions
publisher	World Bank, Washington, DC
publishDate	2012
url	http://documents.worldbank.org/curated/en/2006/02/6559639/trade-inequality-political-economy-institutions http://hdl.handle.net/10986/8778
_version_	1764405981043752960

Trade, Inequality, and the Political Economy of Institutions

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