We follow Acemoglu and Johnson (2005) in disentangling the effects of contracting and property rights institutions on average growth rates over the period 1985--2004 in addition to the log level of per capita income in 1995. On the basis of 2SLS results, we find a robust, positive link between the quality of some contracting institutions and the rate of economic growth and a robust, negative link between contracting institutions and the level of output. We interpret these conflicting results as evidence for a trade-off in the effect of contracting institutions on growth and income levels. We look to rationalize this apparent trade-off in terms of a framework where transactions costs are endogenous to investments made in contracting technologies.
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