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Growth, Institutions and Productivity: An empirical analysis using the Bayesian approach

  • Erkki Siivonen
  • Arto Luoma
  • Jani Luoto

In this paper we explore how the environment offered by institutions influences long-run growth. In order for the estimation results to be trustworthy we control the reliability of the estimates in several ways. Firstly, we include the lagged level of output per worker in the model to control the effect of conditional convergence. Secondly, we use the production function theory to form an environment of other inputs which may affect the parameter value of institutions and handle the issue of endogeneity using convenient instruments for institutions and other inputs. Thirdly, we use institutional indicator which is built using 18 indicators which all reflect the ability of institutions to create an environment in which the citizens can manage their risks they encounter during their life time. Finally, we study the sensitivity of estimation and control the effect of outliers and bad quality of data using a subsample of 22 industrial countries in addition to the total sample of 86 non-oil countries. Our cross-country analysis - based on Bayesian inference - confirms that the production environment offered by institutions has a significant role on economic growth, but it does not seem as dramatical as some may have expected.

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Paper provided by Government Institute for Economic Research Finland (VATT) in its series Research Reports with number 104.

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Date of creation: 07 Nov 2003
Date of revision:
Handle: RePEc:fer:resrep:104
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  1. Acemoglu, Daron & Johnson, Simon & Robinson, James A & Thaicharoen, Yunyong, 2002. "Institutional Causes, Macroeconomic Symptoms: Volatility, Crises and Growth," CEPR Discussion Papers 3575, C.E.P.R. Discussion Papers.
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  5. repec:tpr:qjecon:v:112:y:1997:i:4:p:1203-50 is not listed on IDEAS
  6. Benhabib, Jess & Spiegel, Mark M., 1994. "The role of human capital in economic development evidence from aggregate cross-country data," Journal of Monetary Economics, Elsevier, vol. 34(2), pages 143-173, October.
  7. Rodrik, Dani & Subramanian, Arvind & Trebbi, Francesco, 2002. "Institutions Rule: The Primacy of Institutions Over Geography and Integration in Economic Development," CEPR Discussion Papers 3643, C.E.P.R. Discussion Papers.
  8. Daron Acemoglu & Philippe Aghion & Fabrizio Zilibotti, 2006. "Distance to Frontier, Selection, and Economic Growth," Journal of the European Economic Association, MIT Press, vol. 4(1), pages 37-74, 03.
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  10. Daron Acemoglu & Simon Johnson & James A. Robinson, 2001. "Reversal of Fortune: Geography and Institutions in the Making of the Modern World Income Distribution," NBER Working Papers 8460, National Bureau of Economic Research, Inc.
  11. Daron Acemoglu & Simon Johnson & James A. Robinson, 2001. "The Colonial Origins of Comparative Development: An Empirical Investigation," American Economic Review, American Economic Association, vol. 91(5), pages 1369-1401, December.
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  15. Peter J. Klenow & Mark Bils, 2000. "Does Schooling Cause Growth?," American Economic Review, American Economic Association, vol. 90(5), pages 1160-1183, December.
  16. Aron, Janine, 2000. "Growth and Institutions: A Review of the Evidence," World Bank Research Observer, World Bank Group, vol. 15(1), pages 99-135, February.
  17. Oliver E. Williamson, 2000. "The New Institutional Economics: Taking Stock, Looking Ahead," Journal of Economic Literature, American Economic Association, vol. 38(3), pages 595-613, September.
  18. Hart, Oliver, 1995. "Firms, Contracts, and Financial Structure," OUP Catalogue, Oxford University Press, number 9780198288817, July.
  19. 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.
  20. repec:rus:hseeco:72137 is not listed on IDEAS
  21. John Luke Gallup & Jeffrey D. Sachs & Andrew D. Mellinger, 1998. "Geography and Economic Development," NBER Working Papers 6849, National Bureau of Economic Research, Inc.
  22. John Luke Gallup & Jeffrey D. Sachs & Andrew D. Mellinger, 1998. "Geography and Economic Development," Harvard Institute of Economic Research Working Papers 1856, Harvard - Institute of Economic Research.
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  24. Easterly, W & Levine, R, 1996. "Africa's Growth Tragedy : Policies and Ethnic Divisions," Papers 536, Harvard - Institute for International Development.
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