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Institutions and Economic Performance: Endogeneity and Parameter Heterogeneity

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  • THEO S. EICHER
  • ANDREAS LEUKERT

Abstract

The hallmark of the recent development and growth literature is the quest to identify institutions that explain significant portions of the observed differences in living standards. There are two drawbacks to the prominent approaches that focus either on the global sample, or on developing nations. First, it is unclear whether the identified institutions also hold explanatory power in advanced countries. Second, it is unclear whether the identified institutions matter to the same degree across all countries, or whether perhaps an altogether different set of institutions matters in advanced countries. To address these issues, we examine parameter heterogeneity in prominent approaches to institutions and economic performance. We find that parameter heterogeneity is so strong that it requires a new set of instruments to control for endogeneity. At the same time, however, we confirm that a common set of economically important institutions does exist among advanced and developing nations. The impact of these institutions is shown to vary substantially across subsamples; they are about three times more important in developing countries than in OECD countries. Copyright (c) 2009 The Ohio State University.

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Article provided by Blackwell Publishing in its journal Journal of Money, Credit and Banking.

Volume (Year): 41 (2009)
Issue (Month): 1 (02)
Pages: 197-219

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Handle: RePEc:mcb:jmoncb:v:41:y:2009:i:1:p:197-219

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Web page: http://www.blackwellpublishing.com/journal.asp?ref=0022-2879

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  1. Dani Rodrik & Arvind Subramanian & Francesco Trebbi, 2004. "Institutions Rule: The Primacy of Institutions Over Geography and Integration in Economic Development," Journal of Economic Growth, Springer, vol. 9(2), pages 131-165, 06.
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  3. Edward L. Glaeser & Rafael La Porta & Florencio Lopez-de-Silane & Andrei Shleifer, 2004. "Do Institutions Cause Growth?," NBER Working Papers 10568, National Bureau of Economic Research, Inc.
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  6. Jeffrey A. Frankel & David Romer, 1996. "Trade and Growth: An Empirical Investigation," NBER Working Papers 5476, National Bureau of Economic Research, Inc.
  7. Rafael LaPorta & Florencio Lopez-de-Silane & Cristian Pop-Eleches & Andrei Shleifer, 2003. "Judicial Checks and Balances," NBER Working Papers 9775, National Bureau of Economic Research, Inc.
  8. Acemoglu, Daron & Johnson, Simon & Robinson, James & Thaicharoen, Yunyong, 2003. "Institutional causes, macroeconomic symptoms: volatility, crises and growth," Journal of Monetary Economics, Elsevier, vol. 50(1), pages 49-123, January.
  9. Daron Acemoglu & Simon Johnson, 2003. "Unbundling Institutions," NBER Working Papers 9934, National Bureau of Economic Research, Inc.
  10. Theo Eicher & Till Schreiber, 2010. "Institutions and Growth: Time Series Evidence from Natural Experiments," Working Papers UWEC-2007-15-P, University of Washington, Department of Economics.
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