Can Integrity Replace Institutions? Theory and Evidence

Institutions are important for proper economic performance, but are replaceable by trust or other social norms. We show that when proper institutions and trust are missing, integrity of the individuals can replace them. We construct a model of a transactions-based economy with contracts preceding the transactions, and show that any one of (1) institutions, (2) trust, or (3) integrity, foster economic growth. We construct data of economic performance of social groups in Lebanon, measure integrity and other values of these groups, and use this data and data from Kenya to support one of the model’s predictions. Policy implications are discussed.economic development, institutions, integrity, Lebanon, social norms, trust

Migration of Firms, Home Bias and Economic Growth

This study analyzes the effects of government policies on the short-run and long-run movement of locally owned firms from a developed country to a less-developed country and on the output and growth rate of each country in the presence of home bias, a preference of firms and investors to operate in their home countries. The analysis uses a model which was developed for this purpose, in which growth is stemming from the increase in the number of firms. The study finds that for the less-developed country, harsh policy towards entering firms, such as taxing them in the form of requiring firms to grant partial ownership to local agents, results in better long-run economic performance, compared to free entry or subsidizing these firms, in addition to the harsh policy being less costly.

Are Net FDI Flows and Reversals of Capital Flows a Result of Output Growth?

Literature notes many factors as affecting capital flows, but the effects of these flows over the recipient economies and the overall effect over growth are highly debatable. This study claims that although capital flows may be required for the increase in output, other forces are causing this growth and creating the demand for capital. We construct a model in which growth requires both decisions of firms regarding training of managers in order to expand, representing the absorption capacity of the firms, and capital for the firms expansion. The model shows that in early stages of development when output is low, capital inflows are increasing with an increase in the output, but are not the cause for the output growth. However, when output is higher, an increase in the output is associated with financial outflows since the local savings are increasing by more than the local demand for capital. Although we cannot empirically test the model, we use cross-country regressions to show that capital flows are in-line with the predictions of the model and manage to explain half of the variations in net FDI flows per capita using the stage of development. Many policies regarding capital flows may be, therefore, irrelevant.