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Institutions and Economic Performance: Endogeneity and Parameter Heterogeneity

  • Theo Eicher
  • Andreas Leukert

The hallmark of the recent development and growth literature is the quest to identify institutions that explain significant portions of the observed differences in living standards. There are two drawbacks to the prominent approaches that focus either on the global sample, or on developing nations. First, it is unclear whether the identified institutions also hold explanatory power in advanced countries. Second, it is unclear whether the identified institutions matter to the same degree across all countries, or whether perhaps an altogether different set of institutions matters in advanced countries. To address these issues, we examine parameter heterogeneity in prominent approaches to institutions and economic performance. We find that parameter heterogeneity is so strong that it requires a new set of instruments to control for endogeneity. At the same time, however, we confirm that a common set of economically important institutions does exist among advanced and developing nations. The impact of these institutions is shown to vary substantially across subsamples; they are about three times important in developing countries as in OECD countries.

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Paper provided by University of Washington, Department of Economics in its series Working Papers with number UWEC-2007-16-P.

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Date of creation: Jan 2009
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Publication status: Published in Journal Money Credit and Banking, Volume Vol. 41, (February 2009): 197-219
Handle: RePEc:udb:wpaper:uwec-2007-16-p
Contact details of provider: Postal: Box 353330, Seattle, WA 98193-3330
Web page: http://www.econ.washington.edu/
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  1. La Porta, Rafael & Lopez-de-Silanes, Florencio & Pop-Eleches, Cristian & Shleifer, Andrei, 2004. "Judicial Checks and Balances," Scholarly Articles 3451311, Harvard University Department of Economics.
  2. Acemoglu, Daron & Johnson, Simon & Robinson, James & Thaicharoen, Yunyong, 2003. "Institutional causes, macroeconomic symptoms: volatility, crises and growth," Journal of Monetary Economics, Elsevier, vol. 50(1), pages 49-123, January.
  3. 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.
  4. Torsten Persson & Guido Tabellini & Francesco Trebbi, 2001. "Electoral Rules and Corruption," CESifo Working Paper Series 416, CESifo Group Munich.
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  6. Theo Eicher & Till Schreiber, 2010. "Institutions and Growth: Time Series Evidence from Natural Experiments," Working Papers UWEC-2007-15-P, University of Washington, Department of Economics.
  7. Laura Alfaro & Sebnem Kalemli-Ozcan & Vadym Volosovych, 2007. "Capital Flows in a Globalized World: The Role of Policies and Institutions," NBER Chapters, in: Capital Controls and Capital Flows in Emerging Economies: Policies, Practices and Consequences, pages 19-72 National Bureau of Economic Research, Inc.
  8. Dani Rodrik & Arvind Subramanian & Francesco Trebbi, 2002. "Institutions Rule: The Primacy of Institutions over Geography and Integration in Economic Development," NBER Working Papers 9305, National Bureau of Economic Research, Inc.
  9. Daron Acemoglu & Simon Johnson, 2005. "Unbundling Institutions," Journal of Political Economy, University of Chicago Press, vol. 113(5), pages 949-995, October.
  10. Edward L. Glaeser & Rafael La Porta & Florencio Lopez-de-Silanes & Andrei Shleifer, 2004. "Do Institutions Cause Growth?," Journal of Economic Growth, Springer, vol. 9(3), pages 271-303, 09.
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