1. Investment and Institutions Stephen Nickell April 2006 Presentation to be given at a conference to celebrate the 500 th anniversary of the University of Urbino on 12 May, 2006 in Urbino.

2. Basic Investment Theory

7. This simple framework has the following implications. Factors which raise the mark-up of price on marginal cost will tend to lower investment (by lowering M). Factors which raise productivity will tend to raise investment. Factors which raise wages will tend to lower investment.

9. Institutions and investment Via wages. Unions, by capturing quasi-rents or otherwise, will tend to raise wages and hence reduce investment. Unions are often more effective in the presence of strong EPL but are much weakened if the firm faces a high level of product market competition. Via productivity. Total factor productivity tends to be lower if there is a low level of competition in the product market or a high level of product market regulation including high barriers to entry. Mediators may include R and D or innovation. Via mark-ups. Again low levels of competition or high levels of regulation and barriers to entry tend to raise mark-ups.

10. Institutions and Investment. Evidence. Unions are typically associated with lower investment. Addison and Hirsch (1989), Journal of Labor Economics 7(1). Nickell and Denny (1992), Economic Journal, 102, 874-887. Aidt and Tzannatos (2002), Unions and Collective Bargaining. Economic Effects in a Global Environment (World Bank). There is some evidence that EPL is associated with lower investment. Calcagnini and Saltari (2005).

11. High levels of product market regulation and low levels of competition tend to lower productivity, Nickell (1996), JPE 104(4). Aghion and Griffith (2005), Competition and Growth (MIT Press). High levels of product market regulation and low levels of competition are associated with high mark-ups. Griffith and Harrison (2004), The Link between Product Market Reform and Macro-economic Performance (European Commission).

12. Via both these mechanisms, high levels of product market regulation and low levels of competition tend to lower investment. Alesina, Ardagna, Nicoletti and Schiantarelli (2005), Journal of the European Economic Association, June, 1-35. Griffith and Harrison (2004), as above.

13. There is also evidence that high levels of R and D both within a company and within a companies suppliers raise investment. Evidence connecting product market regulation and competition with R and D is mixed. The most recent and sophisticated research – Griffith, Harrison and Simpson (2005), Institute for Fiscal Studies – suggests that competition raises R and D, and innovation and hence investment.