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Institutional Quality Mediates the Effect of Human Capital on Economic Performance
Author(s) -
AdamsKane Jonathon,
Lim Jamus Jerome
Publication year - 2016
Publication title -
review of development economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.531
H-Index - 50
eISSN - 1467-9361
pISSN - 1363-6669
DOI - 10.1111/rode.12236
Subject(s) - human capital , economics , per capita income , per capita , panel data , government (linguistics) , quality (philosophy) , physical capital , production (economics) , public economics , labour economics , demographic economics , econometrics , macroeconomics , economic growth , population , linguistics , philosophy , demography , epistemology , sociology
Abstract This paper considers the relationship between institutional quality, educational outcomes, and economic performance. More specifically, we seek to establish the linkages by which government effectiveness affects per capita income via its mediating impact on human capital formation. Our empirical approach adopts a two‐stage strategy that estimates national‐level educational production functions that include government effectiveness as a covariate, and uses these estimates as instruments for human capital in cross‐country regressions of per capita income. Our results identify a significant and positive effect of human capital on per capita income levels, and partially resolves the inconsistency between macro‐ and micro‐level studies of the effect of human capital on income. The results remain robust to alternative specifications, extension to a panel setting, subsamples of the data and fully endogenous institutions.