How does the existence of an international institution change the strategic calculations of states engaged in an international dispute? This paper investigates the question by modeling an international institution as an alternative to bilateral bargaining for a dispute settlement. The equilibrium results show that only one of the two countries may find the option of appealing to an international institution attractive, and that the institution can influence the bargaining outcome even when it is not directly involved in settling the dispute. Moreover, the results show that countries condition their behavior on the type of the institution that they are dealing with: While a high capacity institution can induce cooperation, a low capacity institution does not. These findings have important implications for WTO reforms and provide an explanation for restrictive membership adopted by many significant international institutions.