January 2014

IZA DP No. 7886: More Is Better! What Can Firm-Specific Estimates of the Impact of Institutional Quality on Performance Tell Us?

published as 'Is Tinkering with Institutional Quality a Panacea for Firm Performance? Insights from a Semiparametric Approach to Modeling Firm Performance' in: Review of Development Economics, 2018, 22 (1), 1-22

We introduce a novel approach to modeling the impact of institutional quality on firm performance. Our methodology enables us to estimate the marginal effect of institutional quality on TFP, factor inputs and output of each firm, which gives us within-country distributions of these effects and hence a better picture of the winners and losers associated with a particular level of institutional quality. We are also able to model marginal impact of institutional quality on both TFP and the efficiency of use of factor inputs, and hence on output. This is a departure from stylized approaches that focus on the impact on TFP alone, and our approach therefore informs policy discussions about the impact of institutional quality (and their change) on shares of factor inputs in the output. We use cross-country firm-level data for the textiles and garments sector to demonstrate the advantages of this modeling approach in analyzing the impact of institutional quality.