Institutional quality and total factor productivity in Latin America and the Caribbean : exploring the unobservable through factor analysis

Abstract

This document determines, for a sample of Latin American countries, to what extent short-term variations in total factor productivity (TFP) are influenced by changes in institutional quality. Our empirical strategy is two-folded. First, we use statistical tools borrowed from factor analysis to extract from observable outcome indicators, unobservable common factors associated to TFP and institutional quality. Second, panel estimations are performed, linking the latent elements of aggregate factor productivity to the underlying common factors of institutional quality. Results are appealing: economic liberty is positively related to short-term total factor productivity.