This working paper by Andrei A. Levchenko explores the impact of institutional differences on international trade, focusing on the quality of contract enforcement, property rights, and shareholder protection. The paper uses the Grossman-Hart-Moore framework to model contract incompleteness and examines two main scenarios: the Ricardian view and the Grossman-Hart-Moore view of institutions. Under the Ricardian view, better institutions in developed countries lead to a comparative advantage in institutionally intensive sectors, resulting in gains from trade for the North and potential losses for the South. However, the Grossman-Hart-Moore view suggests that institutional differences can create distortions in factor markets, leading to divergent factor prices and mixed welfare effects. The paper also provides empirical evidence that institutional differences are significant determinants of trade flows, supporting the hypothesis that better institutions facilitate trade and improve welfare.This working paper by Andrei A. Levchenko explores the impact of institutional differences on international trade, focusing on the quality of contract enforcement, property rights, and shareholder protection. The paper uses the Grossman-Hart-Moore framework to model contract incompleteness and examines two main scenarios: the Ricardian view and the Grossman-Hart-Moore view of institutions. Under the Ricardian view, better institutions in developed countries lead to a comparative advantage in institutionally intensive sectors, resulting in gains from trade for the North and potential losses for the South. However, the Grossman-Hart-Moore view suggests that institutional differences can create distortions in factor markets, leading to divergent factor prices and mixed welfare effects. The paper also provides empirical evidence that institutional differences are significant determinants of trade flows, supporting the hypothesis that better institutions facilitate trade and improve welfare.