Working Paper: CEPR ID: DP8056
Authors: Antonio Ciccone; Elias Papaioannou
Abstract: International industry data permits testing whether the industry-specific impact of cross-country differences in institutions or policies is consistent with economic theory. Empirical implementation requires specifying the industry characteristics that determine impact strength. Most of the literature has been using US proxies of the relevant industry characteristics. We show that using industry characteristics in a benchmark country as a proxy of the relevant industry characteristics can result in an attenuation bias or an amplification bias. We also describe circumstances allowing for an alternative approach that yields consistent estimates. As an application, we reexamine the influential conjecture that financial development facilitates the reallocation of capital from declining to expanding industries.
Keywords: Amplification Bias; Industry-Country Models
JEL Codes: E23; E44; F30; G10; O40
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Financial development (O16) | Capital reallocation from declining to expanding industries (O14) |
| Financial development (O16) | Industry growth (L16) |
| Better investment opportunities (G11) | Industry growth (L16) |
| Financial development + Better investment opportunities (O16) | Industry growth (L16) |
| US industry characteristics (L60) | Biased estimates (C51) |