Abstract
Do international institutions matter? If so, why? International relations theory offers three broad answers to these questions. First, institutions do not matter because the international system is anarchic. Second, institutions matter because they supplant anarchy with hierarchy. Third, institutions matter because they remedy market failures that impede cooperation under anarchy. I evaluate these rival claims by examining the impact of international dispute settlement mechanisms (DSMs) on preferential trade liberalization. I find that, although the existence of dispute settlement panels promotes trade liberalization, more legalistic DSM features do not. This suggests that, while institutions matter, they do not formally constrain states. Rather, they promote cooperation by facilitating government' reciprocal strategies and raising the reputational costs of noncompliance. In other words, institutions do not change the anarchic nature of international politics but rather make the anarchic system work better.
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