Are Institutions a crucial Determinant of Cross Country Economic Efficiency? A Two-Stage Double Bootstrap Data Envelopment Analysis

Abstract

This paper analyses the role of institutions in enhancing the economic efficiencies across countries in a two stage Double Bootstrap DEA framework based on nonparametric frontier analysis as proposed by Simar and Wilson (2007). In the first stage, cross country workers' efficiency is estimated using a bootstrapped DEA approach over the period of 1990-2000 for 78 countries. In the second stage, the impact of institutions on these efficiency estimates is analyzed in a truncated bootstrapped regression. Twenty-nine institutional indicators from the same period have been utilized to extract three orthogonal factors based on principal component analysis. These factors namely institutional and policy rents, political rents and risk reducing technologies, along with their aggregated index are used as institutional variables. Findings suggest that inefficiencies in the economy are less where institutions are stronger. This study also shows that institutions that curb corruption, bureaucratic inefficiencies, lax regulations and unfriendly business policies, tend to have a larger effect on workers efficiency than other two indices that curb political rents and those that reduce transactional risks. Furthermore, when they are aggregated, the combined impact is more than the individual impact.

Exploring the Role of Institutions in Cross Country Malmquist Productivity Analysis: A Two-Stage Double Bootstrap DEA Approach

“…For measuring quality of institutions, we had taken Institutions variables from Siddiqui and Ahmed (2013b). They are classified into three distinct dimensions namely institutional and policy rents, political rents and risk reducing technologies.…”

“…(12) For a detailed description of the bootstrap procedure, see Simar and Wilson (2000). (13) See Siddiqui and Ahmed (2013b) for details.…”

“…This study decomposes productivity into efficiency and technological change and the impact of institutions on both of these is analyzed using regression analysis. Siddiqui and Ahmed (2013b) showed that those countries that have better quality institutions, utilize their resources more efficiently. (1) The present study attempts to show that institutions not only improve productivity but also identify the channels through which productivity is increased using a two-stage procedure.…”

“…In this study, productivity indices were calculated using the values of output, physical and human capital per worker were taken from the data set developed by Baier et al (2006) which is more comprehensive than any other previously available data used in growth analysis. Data set representing institutional quality was taken from Siddiqui and Ahmed (2013b) in which three orthogonal factors were extracted covering the period from 1990 to 2000 and measuring different theoretical dimensions. (9) Their Index of Institutional Social Technologies (IIST) and its three orthogonal factors were identified through Principal Components Analysis (PCA) utilizing twenty-nine indicators covering 84 countries.…”