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Intermediate Goods, Institutions and Output per Worker

  • Kevin Cowan
  • Alejandro Neut

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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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. Clague, Christopher K., 1991. "Factor proportions, relative efficiency and developing countries' trade," Journal of Development Economics, Elsevier, vol. 35(2), pages 357-380, April.
  2. North, Douglass C, 1994. "Economic Performance through Time," American Economic Review, American Economic Association, vol. 84(3), pages 359-68, June.
  3. James Tybout, 1999. "Manufacturing Firms in Developing Countries: How Well Do They Do, and Why?," Development and Comp Systems 9906001, EconWPA, revised 10 Jun 1999.
  4. 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.
  5. Antonio Ciccone & Kiminori Matsuyama, 1995. "Start-up costs and pecuniary externalities as barriers to economic development," Economics Working Papers 142, Department of Economics and Business, Universitat Pompeu Fabra.
  6. Dixit, Avinash K & Stiglitz, Joseph E, 1977. "Monopolistic Competition and Optimum Product Diversity," American Economic Review, American Economic Association, vol. 67(3), pages 297-308, June.
  7. Venables, Anthony J., 1996. "Trade policy, cumulative causation, and industrial development," Journal of Development Economics, Elsevier, vol. 49(1), pages 179-197, April.
  8. Jean Tirole, 1988. "The Theory of Industrial Organization," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262200716, June.
  9. 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.
  10. Young, Allyn A., 1928. "Increasing Returns and Economic Progress," History of Economic Thought Articles, McMaster University Archive for the History of Economic Thought, vol. 38, pages 527-542.
  11. Rodriguez-Clare, Andres, 1996. "Multinationals, Linkages, and Economic Development," American Economic Review, American Economic Association, vol. 86(4), pages 852-73, September.
  12. Mauro, Paolo, 1995. "Corruption and Growth," The Quarterly Journal of Economics, MIT Press, vol. 110(3), pages 681-712, August.
  13. Beck, Thorsten & Levine, Ross & Loayza, Norman, 1999. "Finance and the sources of growth," Policy Research Working Paper Series 2057, The World Bank.
  14. George J. Stigler, 1951. "The Division of Labor is Limited by the Extent of the Market," Journal of Political Economy, University of Chicago Press, vol. 59, pages 185.
  15. 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.
  16. Rodriguez-Clare, Andres, 1996. "The division of labor and economic development," Journal of Development Economics, Elsevier, vol. 49(1), pages 3-32, April.
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