Institutions and Cultural Heterogeneity as Determinants of National Income: A Random‐Coefficients Stochastic Frontier Model

15 Pages Posted: 16 Jul 2015

Date Written: August 2015

Abstract

Previous research on total factor productivity (TFP) shows that cross‐country differences in income cannot be fully explained by stocks of capital (K), labor (L) and human capital (E). In addition, the omission of major production inputs or the use of proxies to estimate unobservable inputs leads to biased estimation results. This study addresses the above issues by employing a novel econometric approach and provides empirical evidence that a fixed production input, and therefore a country's income, is positively correlated with the existence of British‐style institutions and negatively correlated with cultural heterogeneity and Spanish‐style institutions. Our methodology is twofold. First, using data for 62 countries from 1980 to 2004, we regressed a random‐coefficients stochastic production frontier that allows estimating a fixed unobservable production input without using proxies. Second, the estimated fixed production input is shown to be related to colonial institutions and cultural heterogeneity by means of ordinary least squares and feasible generalized least squares regressions.

Suggested Citation

del Pilar Baquero Forero, Maria and Ida, Takanori and Kuroda, Toshifumi, Institutions and Cultural Heterogeneity as Determinants of National Income: A Random‐Coefficients Stochastic Frontier Model (August 2015). Review of Development Economics, Vol. 19, Issue 3, pp. 710-724, 2015, Available at SSRN: https://ssrn.com/abstract=2631270 or http://dx.doi.org/10.1111/rode.12153

Maria Del Pilar Baquero Forero (Contact Author)

Kyoto University

Yoshida-Honmachi
Sakyo-ku
Kyoto, 606-8501
Japan

Takanori Ida

Kyoto University ( email )

Yoshida-Honmachi
Sakyo-ku
Kyoto, 606-8501
Japan

Toshifumi Kuroda

Tokyo Keizai University

1-7-34, Minami-cho, Kokubunji-shi,
Tokyo, Tokyo 185-8502
Japan

HOME PAGE: http://www.tku.ac.jp/~kuroda/index.html

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