Institutions and Economic Performance: Endogeneity and Parameter Heterogeneity

The hallmark of the recent development and growth literature is a
quest to identify institutions that explain a significant portion
of the observed differences in living standards across countries.
Empirical work in the area focuses almost exclusively on either the
global sample or on developing nations. Certainly it is important
to know which institutions are lacking in these developing
countries, but the analysis provides little evidence for us to know
to what extend a common set of institutions actually matters in
advanced and developing countries. In this paper we examine
parameter heterogeneity in prominent approaches to institutions and
economic performance. We find that a new set of instruments is
necessary to control for endogeneity, but that a common set of
economically important institutions does indeed exist among
advanced and developing nations. The impact of these institutions
does vary substantially across samples; it is about three times as
high in developing countries as compared to OECD countries.