is, use more mechanisms more effectively (reflecting the θ<sup>�</sup> ��|� in Tables 2a and 2b).<sup>28</sup> Thus, for example, it is easy to see the rather surprising result that governance structures that include more than just bilateralism are more effective in Bolivia, the least developed of the six countries, than in all other countries.

To facilitate interpretation of these results, Table 5 lists some standard statistics on the six countries, together with regional and global averages. Nevertheless, none of the statistics on the absolute quality of legal institutions in that table prepare us for the surprising result on Bolivia. Given the low levels of personal trust in Bolivia, it is tempting to think that this result, instead, might be a reflection of comparative, rather than absolute, advantage in the legal realm.<sup>29</sup> This, cannot be a complete explanation. Note that the first two steps of the LCA do not differentiate between Bolivian firms and, for example, Uruguayan firms. Therefore, the greater effectiveness indicated by the LCA for legal institutions in Bolivia than in Uruguay is inconsistent with the much higher ratings for legal institutions in the latter country indicated in Table 5. This is a puzzle that needs further investigation.

We next look at within-country, regional variation in governance structures. We do so by applying the third step of the 3-step method to each country separately, using regional dummy variables as covariates. Tables 6a and 6b report _p_ -values analogous to those in Tables 4a and 4b. The results on FWER strongly reject the hypothesis that our estimated governance structures simply reflect random variation. For supplier-relations, using the FDR we reject the null hypothesis of no association between governance structures and regions at the 5% level for all countries except Bolivia. In contrast, for customer-relations, only Ecuador exhibits significant within-country regional variation in governance structures using the FDR.

Figures 2a and 2b show inter-regional variation in governance structures for those countries where we find statistically significant variation. The prevalence of bilateralism varies enormously. For example, an average firm in Rosario (in Argentina) is 22 percentage points more likely to use pure bilateralism in its relations with suppliers than an average firm in the neighboring region of Cordoba. The difference on the customer side is even starker—44%. Piura (in Peru) has the lowest level of pure bilateralism amongst any of the 17 regions in Figure 2a, even though Peru has the highest level of pure bilateralism of the six countries in Figure 1a.

Perusing all the tables and figures relating to country and regional variation, it is an inescapable conclusion that inter-regional variation is even more important than cross-country variation. For example, the standard deviation of the percentage of bilateralism in Figure 2a is greater within the regions of each of Argentina, Ecuador, Peru, and Uruguay than it is for countries in Figure 1a. Despite the fact that legal systems are country-level institutions in the six

> <sup>28</sup> And thus the ordering of classes is different from that in Tables 2a and 2b of Section IV, which followed the, somewhat arbitrary, order produced in the initial LCA estimates.

> <sup>29</sup> The low level of personal trust is indicated directly in Table 5. Moreover, Bolivia has the highest level of ethnic fractionalization and there is evidence connecting high ethnic fractionalization with low levels of trust (Alesina and La Ferrara 2002 and Knack and Keefer 1997).

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