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Application of Gravity Model to the Analysis of Cross-Country Differences in the Levels of Institutional Development

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  • Dashkeev, Vladimir
  • Freinkman, Lev

Abstract

This paper presents an econometric model intended to explain fundamental cross-country differences in the quality of national economic institutions by using the set of economic, geographical, cultural and historical factors. Our key research hypothesis claims that bilateral trade may be working as a critical channel for institutional evolution, including through import of institutions by less developed countries from their more institutionally advanced trade partners. We follow logic of the modified gravity model of foreign trade to justify the model specification. Econometric analysis was conducted on the performance data of more than 100 countries in 1996-2006. Our results support the hypothesis that many factors that drive international institutional differences are identical to those that define intensity of trade interactions in the traditional gravity model. As a result, global institutional progress has been showing particular historic and geographical patterns. We come to the conclusion that, after controlling for differences in the levels of per capita income, institutional cross-country differences are significantly influenced by countries’ location and geographic neighborhood, and with time countries tend to form homogeneous geographic clusters by the level of institutional development.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 55427.

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Date of creation: 27 Feb 2011
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Handle: RePEc:pra:mprapa:55427

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Keywords: institutional developments; gravity model; drivers of institutional progress; cross-country differences; institutional indicators; role of international trade;

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  1. Hausmann, Ricardo & Pritchett, Lant & Rodrik, Dani, 2004. "Growth Accelerations," CEPR Discussion Papers, C.E.P.R. Discussion Papers 4538, C.E.P.R. Discussion Papers.
  2. Jeffrey Wurgler, 1999. "Financial Markets And The Allocation Of Capital," Yale School of Management Working Papers, Yale School of Management ysm123, Yale School of Management, revised 01 Mar 2001.
  3. Jeffrey D. Sachs, 2003. "Institutions Don't Rule: Direct Effects of Geography on Per Capita Income," NBER Working Papers 9490, National Bureau of Economic Research, Inc.
  4. Thierry Mayer & Soledad Zignago, 2011. "Notes on CEPII’s distances measures: The GeoDist database," Working Papers 2011-25, CEPII research center.
  5. Anderson, James E, 1979. "A Theoretical Foundation for the Gravity Equation," American Economic Review, American Economic Association, American Economic Association, vol. 69(1), pages 106-16, March.
  6. Philip R. Lane & Aaron Tornell, 1999. "The Voracity Effect," American Economic Review, American Economic Association, American Economic Association, vol. 89(1), pages 22-46, March.
  7. Daron Acemoglu & Simon Johnson & James A. Robinson, 2001. "The Colonial Origins of Comparative Development: An Empirical Investigation," American Economic Review, American Economic Association, American Economic Association, vol. 91(5), pages 1369-1401, December.
  8. John F. Helliwell & Robert D. Putnam, 1995. "Economic Growth and Social Capital in Italy," Eastern Economic Journal, Eastern Economic Association, vol. 21(3), pages 295-307, Summer.
  9. Robert J. Barro, 1998. "Determinants of Economic Growth: A Cross-Country Empirical Study," MIT Press Books, The MIT Press, The MIT Press, edition 1, volume 1, number 0262522543, December.
  10. Mauro, Paolo, 1995. "Corruption and Growth," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 110(3), pages 681-712, August.
  11. Jeffrey A. Frankel, 1997. "Regional Trading Blocs in the World Economic System," Peterson Institute Press: All Books, Peterson Institute for International Economics, Peterson Institute for International Economics, number 72, July.
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