Title: Institutional Quality and International Trade
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.