Is Tinkering with Institutional Quality a Panacea for Firm Performance? Insights from a Semiparametric Approach to Modeling Firm Performance

22 Pages Posted: 23 Jan 2018

See all articles by Sumon Kumar Bhaumik

Sumon Kumar Bhaumik

Aston University

Ralitza Dimova

University of Manchester - Institute for Development Policy and Management

Subal C. Kumbhakar

State University of New York (SUNY) at Binghamton - Department of Economics

Kai Sun

Shanghai University

Date Written: February 2018

Abstract

There is a large and growing literature on the impact of institutional quality on economic performance and the broad consensus is that “good” institutions facilitate better economic performance. The literature that provides micro‐level support for the policy discourse about institutional quality does not, however, account for significant intra‐country variation in reactions of firms to changes in business environments, even within the same industry, and it generally ignores the possibility that the impact of institutional quality on firm performance may not be neutral. In this paper, we analyze the impact of institutions on firm performance using an approach that enables us to overcome these problems with the stylized approach. Using cross‐country firm‐level data, we demonstrate that not only does the marginal impact of institutional quality vary significantly within countries, but also that the impact is economically significant only at the two extremes of the distribution. We view this as prima facie evidence that policies that tinker with institutional quality on the basis of the popular wisdom about the impact of these institutions on the average firm may not have the desired or expected impact, at least at the micro level.

Suggested Citation

Bhaumik, Sumon Kumar and Dimova, Ralitza and Kumbhakar, Subal C. and Sun, Kai, Is Tinkering with Institutional Quality a Panacea for Firm Performance? Insights from a Semiparametric Approach to Modeling Firm Performance (February 2018). Review of Development Economics, Vol. 22, Issue 1, pp. 1-22, 2018, Available at SSRN: https://ssrn.com/abstract=3107307 or http://dx.doi.org/10.1111/rode.12311

Ralitza Dimova

University of Manchester - Institute for Development Policy and Management ( email )

Manchester
United Kingdom

Subal C. Kumbhakar

State University of New York (SUNY) at Binghamton - Department of Economics ( email )

Binghamton, NY 13902-6000
United States

Kai Sun

Shanghai University ( email )

149 Yanchang Road
SHANGDA ROAD 99
Shanghai 200072, SHANGHAI 200444
China

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