Holding on? Ethnic divisions, political institutions and the duration of economic declines

Richard Bluhm and Kaj Thomsson

Journal of Development Economics, 2020, vol. 144, issue C

Abstract: We analyze the duration of large economic declines and provide a theory of delayed recovery. We show theoretically that uncertain post-recovery incomes lead to a commitment problem which limits the possibility of cooperation in ethnically heterogeneous countries. Strong constraints on the executive solve this problem by reducing the uncertainty associated with cooperative behavior. We test the model using standard data on linguistic heterogeneity and detailed data on ethnic power configurations. Our findings support the central theoretical prediction: countries with more constrained political executives experience shorter economic declines. The effect is large in ethnically heterogeneous countries but virtually non-existent in homogeneous societies. Our main results are robust to a variety of perturbations regarding the estimation method, the estimation sample, measures of heterogeneity, and measures of institutions.

Keywords: Economic crises; Delayed recovery; Political economy; Ethnic diversity (search for similar items in EconPapers)
JEL-codes: E61 H12 J15 O11 O43 (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (7)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:deveco:v:144:y:2020:i:c:s0304387820300328

DOI: 10.1016/j.jdeveco.2020.102457

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