INSTITUTIONS, INNOVATION AND GROWTH

This paper evaluates the influence of institutions on economic performance by developing a model that explicitly accounts for the effects of institutions on technical innovation and economic growth. The paper contributes to fill a gap in the growth literature and provides insights concerning the dynamics and the interactions among institutions, innovation, income levels and income growth. A major prediction of the model is that “better ” institutional arrangements facilitates the adoption of new technologies and boost innovation, leading to relatively higher levels of output and faster growth rates. In addition, the model suggests that, controlling for other determinants of income, countries or regions with poor institutional arrangements will lag behind in terms of growth and levels of output per capita. The model also supports the argument that human capital is an important input for shaping institutions and promoting innovation. However, it suggests that human capital has no growth effect, i. e; an increase in the stock of human capital, not followed by changes in institutions, will not affect the long-run growth rate of an economy