as a result of trade. If the political power effect is strong enough, or the foreign competition effect is weak enough, institutions will worsen.

What are the conditions under which the two different scenarios are more likely to prevail? The model does not offer an analytical solution with which we could perform comparative statics with pencil and paper, due to both the algebraic complexity of the trade side of the model, and the fact that we cannot find closed-form expressions for the pivotal firm. Nonetheless, we can implement the solution numerically in a fairly straightforward manner. In order to focus especially on the South’s market power and the resulting magnitude of the foreign competition effect, we compare changes in institutions for a grid of parameter values. Starting from an interior autarky equilibrium, we check how it changes in response to trade opening for a grid of L<sup>N</sup> ’s and n<sup>N</sup> ’s.<sup>16</sup> The results are illustrated in Figure 8. It depicts ranges of L<sup>S</sup> /L<sup>N</sup> and n<sup>S</sup> /n<sup>N</sup> for which institutions improve and deteriorate as a result of opening. The shaded area represents parameter values under which institutions deteriorate. Trade is most likely to lead to a deterioration when the economy is both small in size (L<sup>N</sup> is large compared to L<sup>S</sup> ), and captures a large share of world trade in the differentiated good (that is, n<sup>S</sup> is large relative to n<sup>N</sup> ). Under these conditions, there is a large movement in the pivotal voter, while the movement in the Preference Curve is small, or can even be positive — that is, some range of firms may want worse institutions under trade than in autarky in some cases. Intuitively, when there are relatively few producers of the competing good in the North (n<sup>N</sup> is low), the disciplining effect of opening up to foreign competition will be weak. On the other hand, when the size of the foreign demand is large relative to the home labor force, the incentive to push smaller firms out of the market in order to earn higher profits will be higher. In addition, for those firms that do export, larger size of the foreign export market means higher profits, ceteris paribus, and thus more political power at home. We can also highlight the conditions under which the opposite outcome obtains: the disciplining effect of trade predominates. When the number of domestic firms is small vis-a-vis its trading partner, foreign competition in the domestic market forces even the biggest firms to want to improve institutions in order to increase their profits. Thus, when domestic firms capture a very small share of the world market under trade, the shift in the Preference Curve is large. When this is the case, the economy is likely to retain good institutions or even improve them. This effect is more pronounced when the South is also relatively large — the mirror

> 16 We adopt the following parameter values: β = 0.5; ε = 3; k = 4; b = 0.1; LS = 1000; nS = 20; fL =<sup><u>(</u></sup> n<sup>1</sup> S<sup>−</sup> k<sup>α</sup> [1<sup><u>)</u></sup> −<sup><u>β[</u></sup> (1<sup>k−</sup> −<sup><u>(</u></sup> α<sup>ε</sup> )<sup>−</sup> β<sup>1ε)]−</sup> k<sup>L1S];fH=181;τ=1.1;fX=150;λ0=1;λ1=0.875;fN=48.Detailsofnumerical</sup> implementation and the MATLAB programs we used are available upon request.

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