Essays in Institutions, Economic Policy and Development

This thesis consists of three essays examining the relationship between institutions andeconomic development.Essay one focuses on private participation in infrastructure. Over the past decade privateinvolvement in the provision of infrastructure services has grown increasingly commonin a large number of countries around the world. Increased activity brought along a gooddeal of controversy, most frequently relating to the cancellation of high profile projects.This paper analyzes this phenomenon empirically, using project level panel data from the1990-2005 period. My first finding is that, contrary to popular belief, infrastructureproject cancellations are rare. Second, contract cancellations are not randomlydistributed, but seem correlated with a number of factors. I find that cancellation rates arehigher for water sector projects, countries with a poor track record of protecting propertyrights and those with more effective local bureaucracies. Neither the level of GDP percapita nor its growth rate seem to be important factors, but larger current account deficitsare correlated with more cancellations. Essay two examines the economic rationale forindustrial policies aimed at supporting small firms with the intention of improving therate of innovation and economic growth. I argue that such policies, while very commonin the last few decades, frequently ignore two fundamental facts. First, a firms’ size islargely determined by the economic environment surrounding it, and in particular by theuncertainty it must face. Attempts to actively micromanage the mix of small to largefirms while ignoring the environment they operate within is more likely to be harmfulthan helpful. The second often overlooked observation is that small and large firms oftenplay complementary roles in the process of innovation. Instead of attempting to activelypick winners with certain characteristics, policymakers’ efforts are better spent onbuilding a framework which is conducive to all innovation, wherever it may originate.In the third paper I analyze the real world impact of direct financing programs for smalland medium enterprises. I base my analysis on two specific SME financing schemesimplemented in Romania between 1998 and 2004, but my findings are broadlyapplicable. I argue that direct funding programs can suffer from two major flaws: afailure to address the financial system’s binding constraints, and a difficulty in dealingwith imperfect information. I find that both problems were acutely relevant in Romania,where they created programs that appeared successful at the firm level but in fact hadvery limited impact.