International relations scholars and public policy practitioners alike have long advanced the importance of international institutions as a means of promoting stability and cooperation among nations. This dissertation tests that claim using an innovative measure of uncertainty in countries: the risk associated with sovereign bonds, a measure that is of substantive as well as theoretical interest to political scientists. I show how membership in regional trade agreements (RTAs) affects countries' ability to compete on bond markets, arguing that the effect can cut two ways. When less-developed countries join regional trade agreements whose members have strong governance and institutional quality at home, they in turn look less risky to investors. Joining RTAs whose members have relatively weak domestic governance, however, actually makes new entrants look more risky, all else equal. Thus, in striking contrast to previous research, I find that the effect has little to do with the design of the RTA or the policy reform that countries undertake in order to enter. It is instead the company you keep; that is, the governance quality of the other members.
I offer two important contributions to the literature on international cooperation. The first is theoretical: I argue that portfolio investors pay attention primarily to the reputation of other members of an RTA. The positive effect is a consequence of the "seal of approval" that those other countries put on a country's policies, while the negative effect results from countries' increased insulation from the ramifications of default. The second is empirical: through data analysis as well as qualitative field research, I not only show that institutions matter to markets, I also address the questions of "when" and "how."
My Research