Factor Returns, Institutions, and Geography: A View From Trade

Scott L. Baier, Gerald P. Dwyer Jr., and Robert Tamura
Working Paper 2004-17
July 2004

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The authors show that estimated productivities of labor and capital, which rationalize trade flows across countries, are related to total factor productivities, which rationalize output differences across countries. They present evidence that these productivities from trade are related to the institutions and geography across countries. Protection of property rights is the dominant influence on both labor and capital productivity, with geography less important and democracy even less important. The authors also present preliminary evidence that protection of property rights has similar effects on workers with only primary education as on those with more education.

JEL classification: 04

Key words: productivity, institutions, property rights, democracy, geography

The authors thank William Dougan, Stanley Engerman, Casey Mulligan, Rowena Pecchenino, Dani Rodrik, Thomas R. Saving, Robert Tollison, and Daniel Trefler for comments on earlier drafts of this paper. Linda Mundy provided editorial assistance. An earlier version of this paper was presented at the Villa Mondragone International Economic Seminar. Baier appreciates financial support from the BB&T Bank and the Center for International Trade at Clemson University. The views expressed here are the authors’ and not necessarily those of the Federal Reserve Bank of Atlanta or the Federal Reserve System. Any remaining errors are the authors’ responsibility.

Please address questions regarding content to Scott L. Baier, Clemson University, 222 Sirrine Hall, Clemson, South Carolina 29634-1309, 864-656-4534, sbaier@clemson.edu; Gerald P. Dwyer Jr., Federal Reserve Bank of Atlanta, 1000 Peachtree Street, N.E., Atlanta, Georgia 30309-4470, 404-498-7095, gdwyer@dwyerecon.com; or Robert Tamura, Clemson University, 222 Sirrine Hall, Clemson, South Carolina 29634-1309, 864-656-1242, rtamura@clemson.edu.