Does Institutional Quality Condition the Output Returns to Human Capital? Time-Series Evidence from Kenya, 1963–2023

Abstract

Institutional theory predicts that human capital contributes more to output where institutions are strong, but evidence for this conditional relationship comes mainly from multi-country panels, and no study has tested it for Kenya over a long period. This study examines whether institutional quality moderates the long-run effect of human capital on real output in Kenya from 1963 to 2023. It uses Penn World Table 11.0 data on output, capital, employment and schooling, life expectancy and a composite index of rule of law, corruption control and impartial public administration from V-Dem v16. The analysis applies the ARDL bounds testing approach with finite-sample critical values and reports the conditional marginal effect of human capital across the observed range of institutional quality. A stable long-run relationship exists only when health is included alongside schooling (F = 4.44, finite-sample p = 0.021), with about 76% of deviations corrected within a year. Schooling and health are both positively related to long-run output; a 1% rise in life expectancy is associated with a 1.1% rise in output. Institutional quality has no significant direct effect. Stronger institutions do not raise the return to schooling: the conditional elasticity is positive at every observed level of institutional quality, and the interaction is negative, significant at the 5% level in three of ten specifications. The results align Kenya with single-country evidence from Nigeria and Brazil rather than with panel studies. Health investment emerges as a direct contributor to long-run output, and governance reforms are better judged by their effects on service delivery and human capital accumulation than by an assumed amplification of returns to schooling.

Keywords: human capital; institutional quality; health; ARDL bounds test; moderation; Kenya

DOI: 10.7176/JESD/17-7-02

Publication date: October 30^th 2026