We analyze the determinants of effective legal institutions (legality) using data from 49 countries. We show that the way the law was initially transplanted and received is a more important determinant than the supply of law from a particular legal family. Countries that have developed legal orders internally, adapted the transplanted law, and/or had a population that was already familiar with basic principles of the transplanted law have more effective legality than countries that received foreign law without any similar predispositions. The transplanting process has a strong indirect effect on economic development via its impact on legality. JEL Classification Codes: O1, O57, K00 *We would like to than Jan Kleinheisterkamp (Max Planck Institute, Hamburg), for his help with background information on Latin America and the coding of these countries. We are also grateful to the comments of seminar participants at the World Bank and the University of Wisconsin-Madison.

Abstract-How does the quality of national institutions that enforce the rule of law influence international trade? Anderson and Marcouiller argue that bad institutions located in the importer's country deter international trade because they enable economic predators to steal and extort rents at the importer's border. We complement this research and show how good institutions located in the exporter's country enhance international trade, in particular, trade in complex products whose characteristics are difficult to fully specify in a contract. We argue that both exporter and importer institutions affect international as well as domestic transaction costs in complex and simple product markets. International transaction costs are a part of the costs of trade. Domestic transaction costs affect complex and simple products differently, thereby changing a country's comparative advantage in producing such goods. We find ample empirical evidence for these predictions: countries that have good institutions tend to export more complex products and import more simple products. Furthermore, institutions have a stronger influence on trade via production costs (comparative advantage) than through international transactions costs. International institutions seem to operate as substitutes for domestic institutions, because good domestic institutions are less important for promoting exports in those countries that have signed the New York Convention.

No abstract