The Impact of Institutional Friction Cost on Economic Growth: Evidence from OECD Countries

Qingjie Zhou, Dongyao Yu (), Feng Xu and Jiamin Sun
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Qingjie Zhou: School of Economics, Beijing Technology and Business University, Beijing 100048, China
Dongyao Yu: School of Economics, Beijing Technology and Business University, Beijing 100048, China
Feng Xu: School of Economics, Beijing Technology and Business University, Beijing 100048, China
Jiamin Sun: School of Economics, Beijing Technology and Business University, Beijing 100048, China

Sustainability, 2022, vol. 15, issue 1, 1-15

Abstract: The institutional environment is critical to economic growth. A favorable business environment can reduce unnecessary transaction costs. This study examined the impact of institutional friction costs on economic growth, based on panel data for 38 OECD countries from 2004 to 2020. The contribution of this paper is that, first, we explore methods to measure the cost of institutional friction, and the measurements show that the total cost of institutional friction tends to be lower in high-income countries than in upper-middle-income countries. Second, we find that reducing the cost of institutional friction helps to promote economic growth through an empirical fixed-effects analysis approach with panel data. The empirical results remain significant after robustness and endogeneity tests. Third, we find that the effect of institutional friction costs on economic growth is more pronounced in high-income countries and even more pronounced in countries with inefficient governments. Fourth, the mediation effect test finds that institutional friction costs affect economic growth by increasing firm innovation. Overall, reducing the costs of institutional friction helps promote economic growth, and this study suggests that policy makers in each country should develop measures to reduce the costs of institutional friction to improve efficiency and economic development.

Keywords: institutional friction cost; economic growth; business environment (search for similar items in EconPapers)
JEL-codes: O13 Q Q0 Q2 Q3 Q5 Q56 (search for similar items in EconPapers)
Date: 2022
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