Institutional Distance and Cross-National Income Gaps

Huang Xinfei 1, Shu Yuan 2 and Xu Yumin 1

1 International Business School, Sun-Yatsen University, Guangzhou, China
2 Lingnan College, Sun-Yatsen University

Abstract:  This paper examines the root causes of current cross-national institutional difference from the perspective of national hetereogeneity and provides detailed explanations on the justification and effectiveness of using cross-national genetic distance as the instrumental variable (IV) of institutional difference. We combined 10,585 samples by pairing 146 countries and regions, created a cross-national institutional distance variable composed of 14 indicators from the World Bank and the Heritage Foundation in three aspects including differences of political system, economic system and institutional implementation attributes, and conducted a cross-section IV estimation for the long-term effect of institutional differences on cross-national income gaps using data between 1996 and 2010. Empirical results indicate that institutional difference has a long-term significant positive effect on cross-national income gaps and such an effect has a tendency to increase during sample period. With factors like human capital, geographical factor, language and religion under control, we still arrived at similar conclusions. The empirical results are demonstrated to be robust using different genetic distance measurement indicators and estimation methods.
Keywords: institutional distance, cross-national income gap, genetic distance, national heterogeneity, estimation of instrumental variable

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