Estimating the Local Effectiveness of Institutions: A Latent-Variable Approach

33 Pages Posted: 12 Dec 2019

See all articles by Antonia Reinecke

Antonia Reinecke

FernUniversität in Hagen

Hans-Jörg Schmerer

FernUniversitat in Hagen

Date Written: 2019

Abstract

This paper develops an approach that allows constructing regional proxies of government effectiveness at a highly dis-aggregated level. Our idea builds on the well documented interdependence between institutions and exports, which allows estimating the latent government effectiveness using methods of structural equation modeling. Unobserved institutional quality for each individual region is predicted using the regression outcomes. The impact of this novel identification strategy is tested using various panel applications. Results show that the magnitude of the effect of institutional quality can be biased in estimates that neglect regional differences in the effectiveness of institutions.

Keywords: trade, institutions, Chinese plant data, latent variable, structural equation modelling

JEL Classification: D020, F100, P160

Suggested Citation

Reinecke, Antonia and Schmerer, Hans-Jörg, Estimating the Local Effectiveness of Institutions: A Latent-Variable Approach (2019). CESifo Working Paper No. 7979, Available at SSRN: https://ssrn.com/abstract=3502026

Antonia Reinecke (Contact Author)

FernUniversität in Hagen ( email )

Universitätsstrasse 41
Feithstrathe 140
Hagen, 58084
Germany

Hans-Jörg Schmerer

FernUniversitat in Hagen ( email )

Universit¨atsstraße 41
Hagen, 58097
Germany

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