In a simultaneous equations with error components framework, we analyze the institutions-growth relationship. We address individual heterogeneity in cross-country production functions, and endogeneize factor inputs in order to disentangle the direct and indirect effects of institutions on growth. We find that the effects of political freedom on total factor productivity and human capital are positive and significant, but they are negative and significant on physical capital and labor force growth. Economic freedom, on the other hand, has positive and significant effects on total factor productivity, physical and human capital, and labor force growth. The total effects of both freedoms on growth are positive
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