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Institutions And Economic Performance: What Can Be Explained?

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Executive Summary

Institutions are now widely believed to be important in explaining performance. In this paper, the authors analyse whether commonly used measures of institutions have any significant, measurable impact on performance, whether of countries or firms. They look at three 'Levels' of institutions and associated conjectures. The first concerns whether the political system affects performance. The second concerns whether the business and investment environment affects the performance of countries and the third concerns whether perceived business constraints directly affect the performance of firms. In all instances, they find little evidence of a robust link between widely used measures of institutions and the indicators of performance. They consider why this might be the case and argue that mis-measurement, mis-specification, complexity and non-linearity are all relevant factors.

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