NBER WORKING PAPER SERIES INTRINSIC OPENNESS AND ENDOGENOUS INSTITUTIONAL QUALITY Yang Jiao Shang-Jin Wei Working Paper 24052 http://www.nber.org/papers/w24052 NATIONAL BUREAU OF ECONOMIC RESEARCH 1050 Massachusetts Avenue Cambridge, MA 02138 November 2017 We thank Robin Burgess, Donald Davis, Jonathan Eaton, Ruixue Jia, Reka Juhasz, Amit Khandelwal, Yingyi Qian, Stephen Redding, Michael Song, Jon Vogel, David Weinstein and seminar or confernece participants at Columbia, Tsinghua, and ADB for helpful comments, and Joy Glazener for editorial assistance. All remaining errors are our own responsibilities. This paper is a significant rewriting and expansion of Wei (2000b), which has not been submitted for publication. The research was conducted in part when Jiao was a Summer Intern and Wei was Chief Economist of Asian Development Bank. The views in the paper are entirely those of the authors and do not necessarily represent those of any organization with which they are or have been associated, nor of the National Bureau of Economic Research. NBER working papers are circulated for discussion and comment purposes. They have not been peer-reviewed or been subject to the review by the NBER Board of Directors that accompanies official NBER publications. 2017 by Yang Jiao and Shang-Jin Wei. All rights reserved. Short sections of text, not to exceed two paragraphs, may be quoted without explicit permission provided that full credit, including notice, is given to the source.
Intrinsic Openness and Endogenous Institutional Quality Yang Jiao and Shang-Jin Wei NBER Working Paper No. 24052 November 2017 JEL No. F1,O1 ABSTRACT Quality of public institutions has been recognized as a crucial determinant of macroeconomic outcomes. We propose that a country's intrinsic level of openness (due to population size, geography, or exogenous trade opportunities) affects its incentives in investing in better institutions. We present a simple theory and extensive empirical evidence validating the role of intrinsic openness in determining governance quality. This suggests an indirect but important channel for globalization to improve welfare by raising the quality of governance. Yang Jiao Economics Department Columbia University yang.jiao.0606@gmail.com Shang-Jin Wei Graduate School of Business Columbia University Uris Hall 619 3022 Broadway New York, NY 10027-6902 and NBER shangjin.wei@columbia.edu
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