On market integration and the development of institutions: The case of international commercial arbitration

This paper suggests that the institutional basis necessary to support efficient international trade is provided not only by treaties among national governments but also by international coalitions of private agents. International commercial arbitration is an important example of these private coalitions. The paper reviews the provisions and the practice of international arbitration, and presents a general equilibrium model of the relationship between the expansion of international trade and the adoption of arbitration. The model shows that arbitration alters the size and composition of markets, while at the same time responding to exogenous changes in trade.