Econometrics

We argue for incorporating the financial economics of market microstructure into the financial econometrics of asset return volatility estimation. In particular, we use market microstructure theory to derive the cross-correlation function between latent returns and market microstructure noise, which feature prominently in the recent volatility literature. The cross-correlation at zero displacement is typically negative, and cross-correlations at nonzero displacements are positive and decay geometrically. If market makers are sufficiently risk averse, however, the cross-correlation pattern is inverted. Our results are useful for assessing the validity of the frequently-assumed independence of latent price and microstructure noise, for explaining observed crosscorrelation patterns, for predicting as-yet undiscovered patterns, and for making informed conjectures as to improved volatility estimation methods.

We examine the timing of firms' operations in a formal model of labor demand. Merging a variety of data sets from Portugal from 2003, we describe temporal patterns of firms' demand for labor and estimate production-functions and relative labor-demand equations. The results demonstrate the existence of substitution of employment across times of the day/week and show that legislated penalties for work at irregular hours induce firms to alter their operating schedules. The results suggest a role for such penalties in an unregulated labor market, such as the United States, in which unusually large fractions of work are performed at night and on weekends.

In the manifold learning problem one seeks to discover a smooth low dimensional surface, i.e., a manifold embedded in a higher dimensional linear vector space, based on a set of measured sample points on the surface. In this paper we consider the closely related problem of estimating the manifold's intrinsic dimension and the intrinsic entropy of the sample points. Specifically, we view the sample points as realizations of an unknown multivariate density supported on an unknown smooth manifold. We introduce a novel geometric approach based on entropic graph methods. Although the theory presented applies to this general class of graphs, we focus on the geodesic-minimalspanning-tree (GMST) to obtaining asymptotically consistent estimates of the manifold dimension and the Rényi -entropy of the sample density on the manifold. The GMST approach is striking in its simplicity and does not require reconstructing the manifold or estimating the multivariate density of the samples. The GMST method simply constructs a minimal spanning tree (MST) sequence using a geodesic edge matrix and uses the overall lengths of the MSTs to simultaneously estimate manifold dimension and entropy. We illustrate the GMST approach on standard synthetic manifolds as well as on real data sets consisting of images of faces.

We investigate a multiple hypothesis test designed for detecting signals embedded in noisy observations of a sensor array. The global level of the multiple test is controlled by the false discovery rate (FDR) criterion recently suggested by Benjamini and Hochberg instead of the classical familywise error rate (FWE) criterion. In the previous study [3], the suggested procedure has shown promising results on simulated data. Here we carefully examine the independence condition required by the Benjamini Hochberg procedure to ensure the control of FDR. Based on the properties of beta distribution, we proved the applicability of the Benjamini Hochberg procedure to the underlying test. Further simulation results show that the false alarm rate is less than 0.02 for a choice of FDR as high as 0.1, implying the reliability of the test has not been affected by the increase in power.

Given the location of a relative maximum of the log-likelihood function, how to assess whether it is the global maximum? This paper investigates a statistical tool, which answers this question by posing it as a hypothesis testing problem. A general framework for constructing tests for global maximum is given. The characteristics of the tests are investigated for two cases: correctly specified model and model mismatch. A finite sample approximation to the power is given, which gives a tool for performance prediction and a measure for comparison between tests. The sensitivity of the tests to model mismatch is analyzed in terms of the Renyi divergence and the Kullback-Leibler distance between the true underlying distribution and the assumed parametric class and tests that are insensitive to small deviations from the model are derived. The tests are illustrated for three applications: passive localization or direction finding using an array of sensors, estimating the parameters of a Gaussian mixture model, and estimation of superimposed exponentials in noise -problems that are known to suffer from local maxima.

In this paper, we analyze the celebrated EM algorithm from the point of view of proximal point algorithms. More precisely, we study a new type of generalization of the EM procedure introduced in [4] and called Kullback-proximal algorithms. The proximal framework allows us to prove new results concerning the cluster points. An essential contribution is a detailed analysis of the case where some cluster points lie on the boundary of the parameter space.

Household expenditure survey data cannot yield precise estimates of poverty or inequality for small areas for which no or few observations are available. Census data are more plentiful, but typically exclude income and expenditure data. Recent years have seen a widespread use of small-area "poverty maps" based on census data enriched by relationships estimated from household surveys that predict variables not covered by the census. These methods are used to estimate putatively precise estimates of poverty and inequality for areas as small as 20,000 households. In this paper we argue that to usefully match survey and census data in this way requires a degree of spatial homogeneity for which the method provides no basis, and which is unlikely to be satisfied in practice. The relationships that are used to bridge the surveys and censuses are not structural but are projections of missing variables on a subset of those variables that happen to be common to the survey and the census supplemented by local census means appended to the survey. As such, the coefficients of the projections will generally vary from area to area in response to variables that are not included in the analysis. Estimates of poverty and inequality that assume homogeneity will generally be inconsistent in the presence of spatial heterogeneity, and error variances calculated on the assumption of homogeneity will underestimate mean squared errors and overestimate the coverage of calculated confidence intervals. We use data from the 2000 census of Mexico to construct synthetic "household surveys" and to simulate the poverty mapping process using a robust method of estimation; our simulations show that while the poverty maps contain useful information, their nominal confidence intervals give a misleading idea of precision. JEL: I32, C31, C42

This paper analyzes firm panel data to examine how export demand shocks associated with the 1997 Asian financial crisis affected Chinese exporters. We construct firm-specific exchange rate shocks based on the pre-crisis destinations of firms' exports. Because the shocks were unanticipated and large in magnitude, they are a plausible instrument for identifying the impact of exporting on firm productivity and other aspects of firm performance. We find that firms whose export destinations experience greater currency depreciation have slower growth in exports and that export growth increases firm productivity as well as other measures of firm performance. Consistent with the "learning-by-exporting" hypothesis, the productivity impact of export growth is greater when firms export to more developed countries. Southern California, the World Bank, and the NBER conference "Firms and the Evolving Structure of Global Economic Activity".

A technical appendix studies the role of human capital in economic growth, clarifying when human capital influences levels of income but not growth rates and when human capital influences growth rates. The discussion emphasizes the distinction between human capital used for improving technology and human capital used in producing goods and services. Both matter and each separately can influence growth in an economy.

Property rights underly the workings of almost all economic life. In the weightless economy, however, property is intellectual property-not the same as scientific knowledge, perhaps, but intellectual property nonetheless, in having all the same physical and economic properties as knowledge. What difference does this make to economic performance? Danny Tyson Quah asserts the changes will be large, and lays out some of the economic reasoning underlying decisions that societies will need to make.

When an academic, scientist, or research engineer harps on about the knowledge-based economy, it's hard to take as anything other than shameless self-serving hyperbole. Knowledge is, after all, what these people are supposed to be producing, and now here they are, telling the rest of us that that's what drives the economy. Combine those self-promoting tendencies with the superficial observation that computers, the Internet, computer software, and other information technology-all products of scientific research-are more and more used in economic life: Little wonder that knowledge-economy and information-economy pushers are in full feeding frenzy.

The history of economic growth measurement has been one of intimate interplay with economic theorizing, leading from improvements in the accuracy and relevance of growth data, to hypotheses on the critical sources of economic growth, to explaining deep changes in the structure of national economies. Total factor productivity (TFP), previously a measurement residual to be minimized, has since been reinterpreted, and has emerged as the key driver for economic growth. Ideas-scientific and engineering knowledge, R&D, expertise-constitute the prime candidates for explaining TFP, but the supporting empirical evidence remains weak.

When the Secretary of State Stephen Byers earlier this morning spoke of globalisation and worldwide developments, that seemed to me exactly the right perspective to take, i.e., a global one. My remit this morning is narrower; I hope it turns out not to be internally inconsistent. I want to talk about "Unpacking globalisation and new technology in Britain." This is the month that observers remarked on a Wal-Mart effect lowering UK supermarket prices; that, from the US, MIT agreed to a joint venture with Cambridge University on the academics of entrepreneurship and productivity; that NASDAQ announced expanding its operations into a market for high-tech stocks in Europe, in competition with domestic stock markets already here; that Europe's first Internet-based buying cooperative described a mechanism to force down consumer prices across Europe by Internet arbitrage, pooling UK and other consumers' purchasing power; that a judge in the US concluded monopoly practice in Microsoft's bundling operation systems and internet browsers, with the EU watching closely to see what actions it too might take, all in the interests of the consumer.

Rose has written a provocative paper that is likely to be highly cited and to generate a good number of thoughtful responses. 1 Rose's paper-like many other good papers-addresses exactly one straightforward question. Here, that question is, What does a single currency imply for the volume of trade? There are no if's, and's, or but's: A researcher, of course, needs to be careful and systematic in the answers procured. But the vision to go after is unsullied and single-minded.

Digital goods are bitstrings, sequences of 0s and 1s, that have economic value. They are distinguished from other goods by five characteristics: digital goods are nonrival, infinitely expansible, discrete, aspatial, and recombinant. The New Economy is one where the economics of digital goods importantly influence aggregate economic performance. This Article considers such influences not by hypothesizing ad hoc inefficiencies that the New Economy can purport to resolve, but instead by beginning from an Arrow-Debreu perspective and asking how digital goods affect outcomes. This approach sheds light on why property rights on digital goods differ from property rights in general, guaranteeing neither appropriate incentives nor social efficiency; provides further insight into why Open Source Software is a successful model of innovation and development in digital goods industries; and helps explain how geographical clustering matters.

Innovation is the creation of intellectual assets; intellectual assets are distinguished by nonconvexities. But different nonconvexities affect outcomes differently. Provided knowledge is finitely expansible, nonrivalry causes no difficulties for the existence and expost efficiency of competitive equilibrium. However, the minimum-size indivisibility in creating intellectual assets renders competitive equilibrium socially inefficient in general, even though existence is maintained. The inefficiencies have the size of Dupuit triangles. Innovation patterns are invariant within a range of legal structures regulating intellectual asset dissemination.

Innovation is the creation of intellectual assets; intellectual assets are distinguished by nonconvexities. But different nonconvexities affect outcomes differently. Provided knowledge is finitely expansible, nonrivalry causes no difficulties for the existence and expost efficiency of competitive equilibrium. However, the minimum-size indivisibility in creating intellectual assets renders competitive equilibrium socially inefficient in general, even though existence is maintained. The inefficiencies have the size of Dupuit triangles. Innovation patterns are invariant within a range of legal structures regulating intellectual asset dissemination.

This two-phase study examines a physician's use of one of five different types of technology to note a patient's symptoms during the medical interview. In this between-subjects design, 342 undergraduates viewed one of several videos that demonstrated one condition of the doctor/patient interaction. After viewing the interaction, each participant completed a series of questionnaires that evaluated their general satisfaction with the quality of care demonstrated in the medical interview. A main effect of technology condition was present in both phases.

This paper derives optimal employment contracts when workers are risk averse and there are employment and unemployment risks. Without income insurance, consumption rises during employment and falls during unemployment. Optimal employment contracts offer severance compensation and sometimes give notice before dismissal. Severance compensation smooths consumption during employment but dismissal delays insure partially against the unemployment risk because of moral hazard. During the delay consumption falls to give incentives to the worker to search for another job. No dismissal delays are optimal if exogenous unemployment compensation is sufficiently generous. Employment contracts often contain provisions for the payment of severance compensation to dismissed employees, or for delays in dismissals. The most common procedure that delays dismissal is the requirement to give a notice of fixed duration before dismissal. There are, however, other procedures. In many countries, minimum levels of severance compensation and dismissal delays are written in employment laws but private contracts contain similar, if not more, stringent requirements. The OECD (1999) reports that on average in its member states employers are required to give minimum advance

Reduced-form tests of scale effects in markets with search, based on aggregate matching functions, may miss important scale effects at the micro level, because of the reactions of job searchers. We estimate a semi-structural model on a British sample of unemployed people, testing for scale effects on the offer arrival rate and the wage offer distribution. We find scale effects in wage offers but not in offer arrival rates. We also find that reservation wages rise to deliver higher post-unemployment wages but not faster matches, so aggregate matching functions are unaffected by scale.

This paper uses the Panel Study of Income Dynamics to provide some of the first direct evidence that wealth is systematically higher for consumers with predictably greater income uncertainty. However, the apparent pattern of precautionary wealth is not consistent with a standard parameterization of the life cycle model in which consumers are patient enough to begin saving for retirement early in life: wealth is estimated to be far less sensitive to uncertainty than implied by that model. Instead, our results suggest that over most of their working lifetime, consumers behave in accordance with the "buffer-stock" models of saving described in or , in which consumers hold wealth principally to insulate consumption against near-term fluctuations in income.

This paper analyzes the effects of dividend taxation on corporate behavior using the large tax cut on individual dividend income enacted in 2003. Using data spanning 1980 to 2004-Q2, we document a sharp and widespread surge in dividend payments following the tax cut, along several dimensions.

We consider the open economy consequences of U.S. monetary policy, extending the identification approach of Romer and Romer [2004] and adapting it for use with asset prices. Intended policy changes are orthogonalized against the economy's expected future path, which captures any effects from open economy variables. Estimated from a set of bilateral VARs, the dynamic responses of the exchange rate, foreign interest rate, and foreign output are consistent with recent work that identifies U.S. policy via futures market changes and a priori impulse response bounds. We compare the two approaches, finding important commonalities. We also outline some advantages of our approach. JEL Classification: E52, F31, F41 Keywords: open economy monetary policy identification, exchange rate adjustment, interest rate pass-through † This paper supersedes Nuffield College Working Papers 2005-w18 and 2006-w04. The authors acknowledge financial support from British Academy post-doctoral fellowships. We would like to thank

The Internet is provisioned selfishly by Internet Service Providers (ISPs), which results in economic inefficiency. We shed light on the sources of such inefficiency by means of a multi-commodity flow model of how ISPs interconnect and provision communications infrastructure to deliver an ex- ogenous amount of demand. The outcome of the game ISPs play is a set of equilibrium networks sustained by intercon- nection prices computed assuming that transit markets are competitive. Our theoretical results show that equilibrium networks exist under mild assumptions. We also show that on the grounds of cost efficiency, ISPs have no incentive to split traffic flows thus choosing a single path for all the traffic flowing from a specific origin to a specific destina- tion. Furthermore, we show that network provisioning inef- ficiency follows an inverted U-shaped curve as a function of the level of economies of scale. Simulation over small-sized networks confirms our theoretical results. Simulation also shows that ISPs enjoying higher levels of economies of scale in network provisioning become long-haul transit providers and regional ISPs depend on them to deliver their traffic. Using such a transit provider, who can benefit largely from economies of scale, reduces overall provisioning costs close to optimal.

Using a panel of 439 German regions we evaluate and compare the performance of various Neural Network (NN) models as forecasting tools for regional employment growth. Because of relevant differences in data availability between the former East and West Germany, the NN models are computed separately for the two parts of the country. The comparisons of the models and their ex post forecasts are carried out by means of a non-parametric test: viz. the Friedman statistic. The Friedman statistic tests the consistency of model results obtained in terms of their rank order. Since there is no normal distribution assumption, this methodology is an interesting substitute for a standard analysis of variance. Furthermore, the Friedman statistic is indifferent to the scale on which the data are measured. The evaluation of the ex post forecasts suggests that NN models are generally able to correctly identify the fastest-growing and the slowest-growing regions, and hence predict rather well the correct ranking of regions in terms of their employment growth. The comparison among NN models – on the basis of several criteria – suggests that the choice of the variables used in the model may influence the model’s performance and the reliability of its forecasts.

Some probabilistic aspects of the number variance statistic are investigated. Infinite systems of independent Brownian motions and symmetric α-stable processes are used to construct new examples of processes which exhibit both divergent and saturating number variance behaviour. We derive a general expression for the number variance for the spatial particle configurations arising from these systems and this enables us to deduce various limiting distribution results for the fluctuations of the associated counting functions. In particular, knowledge of the number variance allows us to introduce and characterize a novel family of centered, long memory Gaussian processes. We obtain fractional Brownian motion as a weak limit of these constructed processes.

We consider a sequence of random graphs constructed by a hierarchical procedure. The construction replaces existing edges by pairs of edges in series or parallel with probability p and 1−p respectively. We investigate the effective resistance across the graphs, first-passage percolation on the graphs and the Cheeger constants of the graphs as the number of edges tends to infinity. In each case we find a phase transition at p = 1 2 .

We analyze gender wage gaps correcting for sample selection induced by nonemployment. We recover wages for the nonemployed using alternative imputation techniques, simply requiring assumptions on the position of imputed wages with respect to the median. We obtain higher median wage gaps on imputed rather than actual wage distributions for several OECD countries. However, this difference is small in the US, the UK and most central and northern EU countries, and becomes sizeable in southern EU, where gender employment gaps are high. Selection correction explains nearly one half of the observed negative correlation between wage and employment gaps.

The credible identification of endogenous peer group effects-i.e. social multiplier or feedback effects-has long eluded social scientists. We argue that such effects are most credibly identified by a randomly assigned social program which operates at differing intensities within and between peer groups. The data we use are from Project STAR, a class size reduction experiment conducted in Tennessee elementary schools. In these data, classes were comprised of varying fractions of students who had previously been exposed to the Small class treatment, creating class groupings of varying experimentally induced quality. We use this variation in class group quality to estimate the spillover effect. We find that when allowance is made for this 'feedback' effect of prior exposure to the Small class treatment, the peer effects account for much of the total experimental effects in the later grades, and the direct class size effects are rendered substantially smaller.

For a market with an atomless continuum of assets, we formulate the intuitive idea of a ''well-diversified'' portfolio, and present a notion of ''exact arbitrage'', strictly weaker than the more conventional notion of ''asymptotic arbitrage'', and necessary and sufficient for the validity of an APT pricing formula. Our formula involves ''essential'' risk, one based on a specific index portfolio constructed from factors and factor loadings that are endogenously extracted to satisfy an optimality property involving a finite number of factors. We illustrate how our results can be translated to markets with a large but finite number of assets. r , pp. 173-197] for a discussion of naive and efficient diversification. We note here that there is no uniform terminology in the literature. For example, the terms non-diversifiable risk and diversifiable risk used here for the CAPM are also called systematic risk and unsystematic risk in . On the other hand, systematic risk and unsystematic risk used here for the APT model are also referred to as non-diversifiable and diversifiable risk in, for example, [37,38, pp. 116-120].

The empirical analysis in "International R&D Spillovers" is first revisited by applying modern panel cointegration estimation techniques to an expanded data set that we have constructed for the purpose of this study. The new estimates confirm the key results reported in Coe and Helpman about the impact of domestic and foreign R&D capital stocks on TFP. In addition, we show that domestic and foreign R&D capital stocks have measurable impacts on TFP even after controlling for the impact of human capital. Furthermore, we extend the analysis to include institutional variables, such as legal origin and patent protection, in order to allow for parameter heterogeneity based on a country's institutional characteristics. The results suggest that institutional differences are important determinants of total factor productivity and that they impact the degree of R&D spillovers.

This paper summarizes our recent research on evaluating the distributional consequences of social programs. This research advances the economic policy evaluation literature beyond estimating assorted mean impacts to estimate distributions of outcomes generated by different policies and to determine how those policies shift persons across the distributions of potential outcomes produced by them. Our approach enables analysts to evaluate the distributional effects of social programs without invoking the "Veil of Ignorance" assumption often used in the literature in applied welfare economics. Our methods determine which persons are affected by a given policy, where they come from in the ex-ante outcome distribution and what their gains are. We apply our methods to analyze two proposed policy reforms in American education. These reforms benefit the middle class and not the poor.

This paper tests whether manufacturing exporters pay more to educated workers in an e¤ort to ascertain whether the productivity of human capital is raised by exports. Using a panel of matched employer-employee data from Morocco, we …nd no evidence that the education wage premium is higher in exporting sectors and …rms. Although exporters pay more on average, much of the wage di¤erential can be explained by the fact that exporters have a larger workforce and more capital. Educated workers who start working for an exporter do not experience a larger wage increase relative to their previous job. We …nd a mild positive association between exports, technology, and product quality, part of which is due di¤erences in …rm size. We discuss why our results di¤er from those obtained using di¤erent countries and methodologies.

The recent literature has shown that subjective welfare depends on relative income. Much of the existing evidence comes from developed economies. What remains unclear is whether this is a universal human trait or an artifact of a prosperous, marketoriented lifestyle. Using data from Nepal, a mountainous country where many households still live in relative isolation, we test whether poorer and more isolated households care less about relative consumption. We find that they do not. We investigate possible reasons for this. We reject that it is due to parental concerns regarding the marriage prospects of their children. But we find evidence in support of the reference point hypothesis put forth by psychologists: household heads having migrated out of their birth district still judge the adequacy of their consumption in comparison with households in their district of origin.

Does capital-embodied technological change play an important role in shaping labor market inequalities? This paper addresses the question in a model with vintage capital and search-matching frictions where costly capital investment leads to heterogeneity in productivity among vacancies in equilibrium. The paper Þrst demonstrates analytically 1) how technology growth affects equilibrium wage inequality, income shares and unemployment, and 2) how its impact depends on the presence of labor market institutions (welfare beneÞts, Þring taxes). Next, it applies the model to a quantitative evaluation of vintage capital as an origin of wage inequality: through labor market frictions, a 10-year age differential in capital translates into a 4% wage gap among exante equal workers. Finally, the model allows a U.S.-continental Europe comparison: a common embodied technological acceleration interacted with different labor market institutions can explain a substantial part of the differential rise in unemployment and capital share and some of the differential dynamics in wage inequality.

Does capital-embodied technological change play an important role in shaping labor market inequalities? This paper addresses the question in a model with vintage capital and search-matching frictions where costly capital investment leads to heterogeneity in productivity among vacancies in equilibrium. The paper Þrst demonstrates analytically 1) how technology growth affects equilibrium wage inequality, income shares and unemployment, and 2) how its impact depends on the presence of labor market institutions (welfare beneÞts, Þring taxes). Next, it applies the model to a quantitative evaluation of vintage capital as an origin of wage inequality: through labor market frictions, a 10-year age differential in capital translates into a 4% wage gap among exante equal workers. Finally, the model allows a U.S.-continental Europe comparison: a common embodied technological acceleration interacted with different labor market institutions can explain a substantial part of the differential rise in unemployment and capital share and some of the differential dynamics in wage inequality.

This paper offers an original survey of the Malaysian crisis and the effects of the consequent imposition of capital controls by authorities in September 1998 and of their subsequent relaxation in February and September 1999. We identify Malaysia’s unique strengths and weaknesses before the crisis, appreciate the differential timing and nature of the Malaysian crisis vis-à-vis the other neighbouring crisis countries, and distinguish carefully between the restrictive and incentive components of the imposed controls. Against this backdrop, we analyse both the “level” (first-order) effects and the “volatility” (second-order) effects of controls on key macroeconomic, banking and financial market variables. On the level effects, we found the Malaysian recovery (starting late 1998) to be at least as quick, strong and lasting as that of the other crisis countries, and discovered important channels of influence from controls to interest rates (which were lowered) and stock markets (which recovered dramatically). These results on the effectiveness of controls are consistent with earlier studies by Edison & Reinhart (2001) and Kaplan & Rodrik (2001). However, due to the longer time period used here, a stronger restatement of their conclusions is now possible. We study the secondorder effects of controls by introducing a Capital Asset Pricing Model (CAPM)-based portfolio choice model and show how controls, especially when they work as an asymmetric tax on short-term investment, reduce both the volume of speculative flows and the associated interest rate volatility. To test these theoretical results, we set up a standard Generalized Autoregressive Conditional Heteroskedasticity (GARCH) model of interest rate and stock market volatility where capital control dummies are introduced in the variance equation. Our model is an improvement over earlier studies in two ways: a more sophisticated capital control dummy was used to take account of the relaxation of controls in February 1999; and we dealt with the problem of endogeneity in the mean equation by using regressors that are not Granger-caused by the regressand (Malaysian interest rate and stock returns). The model shows that controls did limit interest rate volatility in line with the theoretical prior, but worsened stock market volatility. The latter result lends credence to the view that controls shifted the burden of adjustment from quantity to prices.

It is commonly asserted by economists, comparative political scientists and international policymakers that government effectiveness is important. The liberal tradition holds that good government performance leads to competitive markets and to the efficient delivery of goods and services. These ideas derive from numerous studies emphasising the benefits of good governance. These studies suggest that the incentives for good governance are created by a country’s formal political rules. Political and economic “success are often attributed to a set of formal institutions, social infrastructure, or even mental frameworks. The underlining rationale of this approach is based on the assumption that "institutions matter". Although the literature stressing the benefits of institutions for good governance is prolific, no one has actually been able to prove which institutions matter for social and economic success or to what extent. At the same time, and more fundamentally, most scholars have difficulty agreeing what effective government really is. Added to this conundrum is the reality that fully effective governments and markets have not been attained in any country. In summary, this vast literature is casual and even contradictory in defining which institutions actually matter for good governance and is generally lacking in empirical foundation.