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Intermediate Goods, Institutions and Output per Worker

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  • Kevin Cowan
  • Alejandro Neut

Abstract

This paper tests a specific channel through which institutions affect output per capita: the role of institutions in firm-level division of production. We argue that weaker institutions increase transaction costs, including those incurred by a firm when dealing with suppliers of intermediate goods. Firms respond to these higher costs by substituting intermediate goods produced within the firm for those externally supplied, which in turn discourages specialization and consequently decreases productivity. To test this channel, we rely on differences across sectors in their capacity to substitute internal goods for intermediate goods. We first create an index that measures the 'complexity' of a sector's intermediate structure using data from the United States. Using this index, we find that industries with a more complex intermediate goods structure suffer a relatively larger loss of productivity in countries with poorer institutions. l II) could be helpful on this task.

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Bibliographic Info

Paper provided by Central Bank of Chile in its series Working Papers Central Bank of Chile with number 420.

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Date of creation: Jun 2007
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Handle: RePEc:chb:bcchwp:420

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  1. Robert E. Hall & Charles I. Jones, 1999. "Why Do Some Countries Produce So Much More Output per Worker than Others?," NBER Working Papers 6564, National Bureau of Economic Research, Inc.
  2. Romer, Paul M, 1987. "Growth Based on Increasing Returns Due to Specialization," American Economic Review, American Economic Association, vol. 77(2), pages 56-62, May.
  3. Venables, Anthony J., 1996. "Trade policy, cumulative causation, and industrial development," Journal of Development Economics, Elsevier, vol. 49(1), pages 179-197, April.
  4. Dixit, Avinash K & Stiglitz, Joseph E, 1975. "Monopolistic Competition and Optimum Product Diversity," The Warwick Economics Research Paper Series (TWERPS) 64, University of Warwick, Department of Economics.
  5. James R. Tybout, 2000. "Manufacturing Firms in Developing Countries: How Well Do They Do, and Why?," Journal of Economic Literature, American Economic Association, vol. 38(1), pages 11-44, March.
  6. Rodriguez-Clare, Andres, 1996. "The division of labor and economic development," Journal of Development Economics, Elsevier, vol. 49(1), pages 3-32, April.
  7. George J. Stigler, 1951. "The Division of Labor is Limited by the Extent of the Market," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 59, pages 185.
  8. Paul M. Romer, 1993. "New Goods, Old Theory, and the Welfare Costs of Trade Restrictions," NBER Working Papers 4452, National Bureau of Economic Research, Inc.
  9. Antonio Ciccone & Kiminori Matsuyama, 1993. "Start-up costs and pecuniary externalities as barriers to economic development," Discussion Paper / Institute for Empirical Macroeconomics 83, Federal Reserve Bank of Minneapolis.
  10. Jean Tirole, 1988. "The Theory of Industrial Organization," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262200716, December.
  11. North, Douglass C., 1993. "Economic Performance through Time," Nobel Prize in Economics documents, Nobel Prize Committee 1993-2, Nobel Prize Committee.
  12. Clague, Christopher K., 1991. "Factor proportions, relative efficiency and developing countries' trade," Journal of Development Economics, Elsevier, vol. 35(2), pages 357-380, April.
  13. Beck, Thorsten & Levine, Ross & Loayza, Norman, 1999. "Finance and the sources of growth," Policy Research Working Paper Series 2057, The World Bank.
  14. Young, Allyn A., 1928. "Increasing Returns and Economic Progress," History of Economic Thought Articles, McMaster University Archive for the History of Economic Thought, McMaster University Archive for the History of Economic Thought, vol. 38, pages 527-542.
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Cited by:
  1. Aljaz Kuncic, 2012. "Institutional Determinants of Bilateral Trade: Taking Another Look," Kiel Advanced Studies Working Papers, Kiel Institute for the World Economy 462, Kiel Institute for the World Economy.
  2. Krishna, Pravin & Levchenko, Andrei A., 2013. "Comparative advantage, complexity, and volatility," Journal of Economic Behavior & Organization, Elsevier, vol. 94(C), pages 314-329.
  3. Ahsan, Reshad N., 2013. "Input tariffs, speed of contract enforcement, and the productivity of firms in India," Journal of International Economics, Elsevier, vol. 90(1), pages 181-192.
  4. Julian di Giovanni & Andrei A. Levchenko, 2010. "The Risk Content of Exports: A Portfolio View of International Trade," NBER Working Papers 16005, National Bureau of Economic Research, Inc.
  5. Ana Fernandes, 2012. "Institutions and the Sectoral Organization of Production," Diskussionsschriften, Universitaet Bern, Departement Volkswirtschaft dp1207, Universitaet Bern, Departement Volkswirtschaft.
  6. Marcella Nicolini, 2007. "Institutions and Offshoring Decision," CESifo Working Paper Series 2074, CESifo Group Munich.
  7. Julian di Giovanni & Andrei A. Levchenko, 2006. "Openness, Volatility and the Risk Content of Exports," 2006 Meeting Papers, Society for Economic Dynamics 86, Society for Economic Dynamics.

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