The determinants of economic institutions and the knock-on effects on GDP per capita

Jose Ronaldo Castro Souza Junior, Daniel Gross and Lizia Figueiredo

MPRA Paper from University Library of Munich, Germany

Abstract: There have been only a small number of empirical studies assessing the determinants of economic institutions despite the development of several notable theories regarding their origins and their impact on economic development. In this article, we identify the key determinants of economic institutions highlighted in the theoretical literature and select empirical proxies that best represent them while also ensuring as large a sample of countries as possible. With economic institutions as the dependent variable, we use a dynamic panel data model which allows us to deal with endogeneity problems. Our results indicate that democratic political institutions, years of schooling and political regime duration have a positive and statistically significant effect, and income inequality has a negative and statistically significant effect on the quality of economic institutions. Our main results are robust to removing certain groups of countries from the sample. We also use an interaction term to evaluate if regime duration has a stronger effect on the quality of economic institutions in autocracies than democracies, however the results we found are not robust to the two democratic political institutions data sources used in this paper. In the second part of the article, we use the same dynamic panel data model but with GDP per capita as the dependent variable. When we control for the quality of economic institutions, the association between democratic political institutions and GDP per capita switches from positive to negative. This and other evidence support our hypothesis that democratic political institutions have a positive indirect effect on per capita income via economic institutions.

Keywords: economic institutions; political institutions; law and economics (search for similar items in EconPapers)
JEL-codes: C5 K1 O1 (search for similar items in EconPapers)
Date: 2023-01-09
New Economics Papers: this item is included in nep-gro and nep-pol
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