# **Advanced Regression Analysis (Positive Test)**

Using either the identification strategy encapsulated in expressions (4.07) or (4.08), the high-income or pooled dataset, and the different combined measures of limited government (additive index and confirmatory factor analysis results), it is possible to determine, with greater confidence, whether the predictions of the model can robustly anticipate empirical outcomes. This is because not only is the use of an overall index of limited government more likely to convey a country’s actual (multi-dimensional) EDD/NEDD ratio, but the use of a larger sample also allows all major theoretically and empirically identified determinants of rent extraction to be controlled for, thus reducing the risk of omitted variable bias. However, as noted above, given that the model does not provide a basis for predicting appropriate weights for the different variables, measurement error is a concern. The use of two different measures of the limited government, several different robustness tests, and the ability to compare the results with the results in Table 1.01 can be used to assess the validity of the findings. In this case, if the theoretical predictions are correct, the results below should be significant and not qualitatively different from the above-noted findings.

Table 1.02 reports the results of seven different regression specifications used to examine the theoretical expectations derived from the model. Irrespective of the specification used, the results are the same. As anticipated by the model and the theory, more limited government (a higher EDD/NEDD ratio) in an advanced income democratic context is associated with less perceived rent extraction. Specifically, these results remain robust despite the use of: (1) different independent variables (additive versus factor); (2) different sample size (OECD only versus pooled sample/all observation); (3) different distributional assumptions (GLM versus OLS versus Ordered Probit); (4) different robustness tests (reweighting observations to eliminate outliers); and (5) the inclusion of different control variables (Basic Controls, All additional Controls, Coordinated Capitalist Economies; see above and Hamilton 2012 for details).

Regression Model 1 of Table 4.03 is the simplest model possible, and conveys how the additive index of limited government (higher EDD/NEDD ratio) affects the level of perceived rent extraction utilizing only the most basic control variables, and restricted to the sub-sample of OECD countries. The results, which are significant at the 1% level and consistent with the theoretical expectations of the model, suggest that more limited government (a higher EDD/NEDD ratio) is associated with less perceived rent extraction. Regression Model 2 is identical to Regression Model 1, but also includes a control for ‘coordinated capitalist economies’ in which peak organizations play a critical role in policy-making (Hall and Soskice, 2001). These may, therefore, provide an alternative incentive for public policy-makers to minimize their rent extraction (Olson, 1981). While this control has the expected negative sign (more peak organizations engender less rent extraction) the results are insignificant and do not alter the basic result of the Regression Model 1. Here, a higher EDD/NEDD ratio is associated with less rent extraction. Utilizing the factor analysis measure of limited government (higher EDD/NEDD ratio), Regression Model 3 yields the same qualitative results, indicating that measurement error due to miss-specified weights may not be a major problem. Once again, the dependent variable, assuming it is ordinal and discrete, rather than interval and continuous (Regressions 4 and 5) has no effect on the results which are still significant at the 1% level, and have the theoretically anticipated sign. Utilizing the pooled dataset and all possible determinants of rent extraction identified in the literature (Regression Model 6 and 7) also does not affect the results, which remain significant at the 1% level. Finally, Regression Model 8 shows the importance of the macro-level context. As both the interaction term of the EDD/NEDD ratio and a high-income and democratic context and the independent effect of both the EDD/NEDD ratio and a high-income democracy context, are all negative and significant on the level of perceived rent extraction. Furthermore, when utilizing the subsample of countries that are not high-income democracies (not shown), the EDD/NEDD ratio is positive and statistically significant. The reasons for this may be multiple (government extensiveness may be correlated with state capacity in some developing countries) and it is beyond the scope of this work to investigate. However, the fact that the effect of the EDD/NEDD ratio in high-income democracies differs from non-highincome democracies clearly demonstrates the importance of how macro-contextual and meso-contextual factors may have different interaction effects.

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