Nonlinearities in the institutions-growth relationship in a dynamic panel data framework: Evidence from China’s provinces
利用中国省级面板数据和NERI市场化指数，研究发现制度质量与经济增长存在非线性关系：在制度质量极低时改善制度会抑制增长，超过临界值后转为促进，但最终出现边际收益递减。
It is by now a well-established fact that good institutions are key to long-run economic performance. However, there is also a growing body of literature that argues that the nature of the interaction between institutional quality and economic growth is complex and might not always be positive and linear. Our paper contributes to this discussion by focusing on China, which has achieved remarkable growth over three decades despite relatively low institutional quality. In particular, we analyze potential nonlinearities in the institutions-growth relationship across Chinese provinces within a dynamic panel data framework using Fan et al.’s NERI marketization index and system GMM estimation techniques. Our findings show that improvements in institutions are harmful to economic growth at very low levels of institutional quality. This attenuating-growth effect persists until a critical threshold is reached; beyond this threshold, the positive effect of institutional quality on growth starts to unfold and continues rising up to a second threshold after which diminishing marginal returns of institutional quality start to manifest. Importantly, our findings are robust when using an alternative measure of economic activity, namely satellite night-time lights. Our findings have important policy implications for China and other developing countries that are seeking to enhance their economic growth prospects through institutional reform.