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This chapter describes how the institutional design of new democracies affect their political evolution. By institutions, it refers to formal political institutions, including political parties, electoral systems, and state design (namely federal versus unitary states). In addition to the decision to create a federal versus a unitary state, some scholars and policymakers have advocated for a consociational approach to democracy in countries that feature significant ethnic, religious or other cleavages. Consociational democracy is essentially a democracy that allows for significant power sharing—or the ability to access positions of power—among the country's various factions. Ultimately, institutions can play a particularly critical role in the consolidation and sustainment of democracy because they structure and constrain political behaviour. The chapter then considers the relationship between institutions and democratization.

This chapter examines the domestic sources of foreign economic policies. Different people in every society typically have different views about what their government should do when it comes to setting the policies that regulate international trade, immigration, investment, and exchange rates. These competing demands must be reconciled in some way by the political institutions that govern policy making. To really understand the domestic origins of foreign economic policies, we need to perform two critical tasks: identify or map the policy preferences of different groups in the domestic economy; and specify how political institutions determine the way these preferences are aggregated or converted into actual government decisions. The first task requires some economic analysis, while the second requires some political analysis. These two analytical steps put together like this, combining both economic and political analysis in tandem, are generally referred to as the political economy approach to the study of policy outcomes. The chapter then considers the impact of domestic politics on bargaining over economic issues between governments at the international level.