A General Equilibrium Approach to Taxonomy of Institutional Proxies for Innovation Outcomes

Abstract

This study develops a new formal theoretical rubric for ranking of proxies for institutional factors that, conceptually, have taxonomy of either of facilitators of, or constraints on economic development. Illustrative implementations of the formal theoretical rubric reveal that spending on each of elementary or secondary education has taxonomy, not of social capital, but of `Productive Capability'. Conditional on optimal spending on primary and secondary education, stock markets are beneficial for welfare of individuals, and are shown to have taxonomy, not of investment capability, but of `Innovation Capability'. An hitherto unexplored factor shown to rank high as facilitator of economic development is `Policy Capability' that incentivizes export orientation within a domestic economy. Alongside spending on education, and stock market size, this policy capability is shown to be more important for realization of economic development than the stock of physical capital within an economy. All rank preferences are shown to satisfy the Strong Axiom of Revealed Preference (SARP). Empirical tests reveal importance of availability and application of formal theoretical rubrics to characterization and interpretation of effects of institutional factors that, conceptually, have taxonomy of facilitators of, or constraints on economic development.