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Democracy, Diversification and Growth Reversals

David Cuberes () and Michal Jerzmanowski ()

Economic Journal, 2009, vol. 119, issue 540, 1270-1302

Abstract: There is much evidence that less democratic countries experience more high‐frequency growth volatility. In this article we report a similar finding about volatility in the medium term: we find evidence that reversals of trend‐growth are sharper and more frequent in non‐democracies. Motivated by this evidence, we construct a model in which non‐democracies have high barriers to entry for new firms. This leads to less sectoral diversification and so, in an uncertain environment, to larger growth swings in less democratic countries. We present empirical evidence that confirms the positive relation between democracy and industrial diversification.

Date: 2009
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Economic Journal is currently edited by Estelle Cantillon, Martin Cripps, Andrea Galeotti, Morten Ravn, Kjell G. Salvanes, Frederic Vermeulen, Hans-Joachim Voth and Rachel Kranton

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