Property Rights Institutions and Firm Performance: A Cross-Country Analysis MAHMUT YASAR The University of Texas at Arlington, Arlington, TX, USA CATHERINE J. MORRISON PAUL   University of California, Davis, CA, USA and MICHAEL R. WARD * The University of Texas at Arlington, TX, USA Summary. — This paper empirically examines the link between firms’ performance and institutional quality using data for firms in 52 countries. We control for potential endogeneity by instruments alternatively based on legal origin and “related-firm” institutions, and by a “bribery” variable. We also use two indicators of institutional quality: firms’ expectations that their contractual and property rights will be protected by the legal system, and a property rights index from The Heritage Foundation. We incorporate firm-specific characteristics including industry type and international linkages. We find significantly positive relationships between firms’ performance and perceived property rights protection independent of other observable firm characteristics. Ó 2010 Elsevier Ltd. All rights reserved. Key words — legal enforcement, property rights, institutions, firm performance, productivity, cross-country analysis “ Institutions are the humanly devised constraints that struc- ture human interaction. They are made up of formal constraints (e.g., rules, laws, constitutions), informal constraints (e.g., norms of behavior, conventions, self-imposed codes of conduct), and their enforcement characteristics. Together they define the incentive structure of societies and specifically economies. Insti- tutions and the technology employed determine the transaction and transformation costs that add up to the costs of produc- tion.” North (1994). 1. INTRODUCTION Over the past decade a sizable literature has emerged on the role of institutions in economic performance and growth. It has been hypothesized that institutional mechanisms create the “rules of the game” (North, 1990) that determine the strat- egies of both domestic and foreign firms (Wright, Filatotchev, Hoskisson, & Peng, 2005). Firms’ productivity and economic performance are thus expected to be augmented by higher quality institutions that are more supportive of firms’ business strategies and competitiveness. In particular, North (1990) defines an economic institution as, “... an arrangement between economic units that defines and specifies the ways by which these units can co-operate or compete” (p. 5). He argues that higher quality institutions re- duce transaction and transformation costs, allowing firms to increase productivity by planning and organizing (or strategiz- ing) more effectively, resulting in improved performance and competitiveness and thus higher industry- and country-level productivity growth. Further, Dixit (2009) emphasizes the “support” of economic activity and transactions provided by the “structure and functioning” of legal institutions, including the security of property rights as one of the “three essential prerequisites of market economies.” In accordance with these predictions about the importance of institutions for economic development, recent macroeconomic studies have examined the role of institutional structure in international comparisons of economic performance using cross-country data. Some of these studies have explored this relationship by using clever instruments to control for reverse causality. For example, Hall and Jones (1999) use the distance from the equator as an instrument to show that differences in institutions and government policies are primary factors under- lying countries’ income differences. La Porta, Lopez-de- Silanes, Shleifer, and Vishny(1998, 1999), Acemoglu, Johnson, and Robinson (2001), Djankov, La Porta, Lopez-de-Silanes, and Shleifer (2002), Glaeser, La Porta, Lopez-de-Silanes, and Shleifer (2004), and Acemoglu and Johnson (2005) similarly use instruments including legal and colonial origins and human capital to identify country-level growth, investment, and finan- cial impacts of legal institutions. 1 These studies use country-level data to show that institu- tions matter for economic development. However, analyses   Catherine J. Morrison Paul passed away on June 30, 2010. She was a leading economist in applied production economics and econometrics, who made significant contributions to the economic development field. She ranks amongst the top in both the quantity and quality of her publ- ished work. She will be missed greatly, but many will continue the work in her spirit. * We would like to thank the World Bank Enterprise Surveys Staff for very helpful discussions about the data. We also thank two anonymous referees for useful suggestions and comments. Final revision accepted: August 26, 2010. World Development Vol. 39, No. 4, pp. 648–661, 2011 Ó 2010 Elsevier Ltd. All rights reserved 0305-750X/$ - see front matter www.elsevier.com/locate/worlddev doi:10.1016/j.worlddev.2010.09.009 648