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Fata Morganas In Oil-Rich, Institution-Poor Economies

Jodie Gatti (), Gavin Triplet () and Alexander James
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Jodie Gatti: Department of Economics and Public Policy, University of Alaska Anchorage
Gavin Triplet: Department of Economics and Public Policy, University of Alaska Anchorage

No 2018-01, Working Papers from University of Alaska Anchorage, Department of Economics

Abstract: Oil-dependent countries suffer from bad institutions, but is oil the culprit? Herein we argue that weak institutions lead to resource dependence, and that this form of reverse causality does not merely bias the estimated effect of oil dependence, it is solely responsible for it. We highlight this point in a novel way. We first document a robust inverse relationship between oil dependence and institutional quality across countries. We then re-estimate this relationship holding the value of resource production constant across all countries. The two sets of results are statistically indifferent, meaning that variation in GDP fully explains why oil-dependent economies suffer from bad institutions. This remarkable finding offers broad implications that reach beyond the resource-development literature and speaks generally to the practice of scaling explanatory variables by GDP.

Keywords: Resource Curse; Resource-Dependent Countries; Estimation Bias (search for similar items in EconPapers)
JEL-codes: Q3 Q4 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dev and nep-ene
Date: 2018-01
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