Research on contracting institutions and convergence

This study constructs and tests a Schumpeterian growth model of cross-country convergence incorporating contract incompleteness. The model implies that all countries above some critical value of contracting institutional quality should converge to the frontier growth rate. And contracting institutional quality has a positive effect on steady state per capita GDP, but this effect eventually vanishes under certain assumptions. Due to differences in the quality of contracting institutions across countries, the global economy exhibits “club convergence”. The empirical findings align closely with the theoretical model, and indicate that contracting institutions affect economic convergence and growth, and this effect is robust even after controlling for financial development and other institutions.