Does institutional quality affect firm performance? Insights from a semiparametric approach

Sumon Bhaumik, Ralitza Dimova, Subal Kumbhakar, Kai Sun

Research output: Preprint or Working paperDiscussion paper

Abstract

Using a novel modeling approach, and cross-country firm level data for the textiles industry, we examine the impact of institutional quality on firm performance. Our methodology allows us to estimate the marginal impact of institutional quality on productivity of each firm. Our results bring into question conventional wisdom about the desirable characteristics of market
institutions, which is based on empirical evidence about the impact of institutional quality on the average firm. We demonstrate, for example, that once both the direct impact of a change in institutional quality on total factor productivity and the indirect impact through changes in efficiency of use of factor inputs are taken into account, an increase in labor market rigidity may have a positive impact on firm output, at least for some firms. We also demonstrate that there are significant intra-country variations in the marginal impact of institutional quality, such that the characteristics of “winners” and “losers” will have to be taken into account before policy is introduced to change institutional quality in any direction.
Original languageEnglish
Place of PublicationBonn (DE)
PublisherIZA
Number of pages30
VolumeIZA DP No. 6351
Publication statusPublished - Feb 2012

Publication series

NameIZA discussion paper series
PublisherForschungsinstitut zur Zukunft der Arbeit
No.IZA DP No. 6351

Keywords

  • institutional quality
  • firm performance
  • textiles industry
  • marginal effect

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