What Matters More, Institutions or Specifications? A Critical Assessment of the Correlates of Institutional Development
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Abstract
It is accepted in most quarters that “institutions matter” when it comes to economic development. The problem is that there are many measures of the different dimensions of institutional environments. These dimensions’ overlap while also correlating with other explanations of economic development. These correlations present thorny empirical issues for researchers. In addition, specification search methods may bias results (Leamer, 1983). This paper investigates six dimensions of institutional development using a corresponding institutional measure for each and their relationships to income levels or growth rates. Although the literature examining the relationship between institutions and economic development is extensive and has accepted the need for robustness checks, there are precedents for a full application of Leamer’s preferred methodology. While we find that countries with improvements in economic freedom are likely to experience faster rates of economic growth, there is nevertheless support for Leamer’s criticism
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