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Research related to:  Institutions

The European Origins of Economic Development

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Although a large literature argues that European settlement outside of Europe during colonization had an enduring effect on economic development, researchers have been unable to assess these predictions directly because of an absence of data on colonial European settlement. We construct a new database on the European share of the population during colonization and examine its association with economic development today. We find a strong, positive relation between current income per capita and colonial European settlement that is robust to controlling for the current proportion of the population of European descent, as well as many other country characteristics. The results suggest that any adverse effects of extractive institutions associated with small European settlements were, even at low levels of colonial European settlement, more than offset by other things that Europeans brought, such as human capital and technology. 

William Easterly and Ross Levine

Discovering Law: Hayekian Competition in Medieval Iceland

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It is commonplace to assume that legal institutions must be established and enforced by government. The general consensus, even among defenders of free markets, is that some minimal government need exist to provide law. However, between 930 and 1262 the Icelandic Commonwealth (or Free State) functioned in the absence of a coercive state, relying instead on market mechanisms and private institutions. An elaborate legal system developed that guided social interaction and coordinated conflict resolution, without a central government. This article utilizes Hayek’s theory of competition as a discovery process to examine the general social structure and private legal institutions within Medieval Iceland. The goal is to provide an economic theoretical lens to more adequately explain the particular private legal institutions that enabled Iceland to function successfully without a central government for over 300 years.
Carrie B. Kerekes and Claudia R. Williamson

The Amplification Effect: Foreign Aid's Impact on Political Institutions

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How does foreign aid affect recipient countries’ political institutions? Two competing hypotheses offer contradictory predictions. The first sees aid, when delivered correctly, as an important means of making dictatorial recipient countries more democratic. The second sees aid as a corrosive force on recipient countries’ political institutions that makes them more dictatorial. This paper offers a third hypothesis about how aid affects recipients’ political institutions that we call the “amplification effect.” We argue that foreign aid has neither the power to make dictatorships more democratic nor to make democracies more dictatorial. It only amplifies recipients’ existing political institutions. We investigate this hypothesis using panel data for 124 countries between 1960 and 2009. Our findings support the amplification effect. Aid strengthens democracy in already democratic countries and dictatorship in already dictatorial regimes. It doesn’t alter the trajectory of recipients’ political institutions.
Nabamita Dutta, Peter T. Leeson and Claudia R. Williamson

Dignity and Development

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This paper explores how expanding the notion of informal institutions in the broader institutional framework provides a more complete explanation for development. Specifically, I incorporate McCloskey’s notion of ‘dignity and liberty’ as part of the institutional nexus. By doing so, a richer explanation and understanding of the importance of institutions in explaining different economic outcomes is offered. Focusing on bourgeois dignity offers a precise mechanism to explain how institutions matter to support economic growth. In addition, analyzing the changing attitudes towards the bourgeoisie provides a specific example of mechanisms that can lead to institutional change.
Claudia R. Williamson

Reestablishing the Income-Democracy Nexus

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Reestablishing the Income-Democracy Nexus
A number of recent empirical studies have cast doubt on the “modernization theory” of democratization, which posits that increases in income are conducive to increases in democracy levels. This doubt stems mainly from the fact that while a strong positive correlation exists between income and democracy levels, the relationship disappears when one controls for country fixed effects. This raises the possibility that the correlation in the data reflects a third causal characteristic, such as institutional quality. In this paper, we reexamine the robustness of the income-democracy relationship . . . 
Jess Benhabib, Alejandro Corvalan and Mark M. Spiegel

Democratic Transitions and Implicit Power: An Econometric Approach

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Recent works of political economy have emphasized the importance of distinguishing between transfers of explicit and implicit power over economic decision making in democratic transitions. Scholars have so far provided interesting anecdotal evidence supporting their claims of potential divergence between transfers of explicit and implicit power. In this paper we apply econometric techniques to examine if a transfer of explicit power has not also been accompanied by a transfer of implicit power. We do so in the context of a major country where considerable uncertainty remains over the military’s implicit role in economic decision making . . . 
Shanker Satyanath and Gokce Goktepe

Institutions and Economic Performance: An Introduction to the Literature

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This essay serves as the introduction to a collection of critical writings on the relationship between institutions and economic performance. The essay not only provides an overview of the field but also explores some of the thorny questions surrounding the definition and measurement of institutions.
Kevin E. Davis

Democratic Transitions and Implicit Power: An Econometric Approach

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Recent works of political economy have emphasized the importance of distinguishing between transfers of explicit and implicit power over economic decision making in democratic transition. Scholars have so far provided interesting anecdotal evidence supporting their claims of potential divergence between transfers of explicit and implicit power. This raises the question of whether it is possible to econometrically identify when a transfer of explicit power has not also been accompanied by a transfer of implicit power. This paper offers a straightforward and easily replicable approach to addressing this question using the tools of financial econometrics. We apply this approach here to a major country where considerable uncertainty remains over the military's implicit role in economic decision making long after an explicit transfer of power to elected leaders, namely Turkey. Our findings indicate a significant gap between the explicit and implicit aspects of Turkey's democratic transition, adding support to scholars' claims about the importance of distinguishing between these aspects of transitions.
Gokce Goktepe and Shanker Satyanath

Cultural Context: The Productivity of Capitalism

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Does capitalism perform better when embedded in certain cultures? Given the wide range of economic success and failure, we address potential causes for the effectiveness or ineffectiveness of institutional constraints. This paper argues that culture matters for the success of capitalist institutions, specifically economic freedom. We claim that different cultures may raise or lower the productivity of economic institutions by either constraining or supporting these rules. We analyze this relationship empirically by examining how the interaction between economic freedom and culture affects economic growth. Our results suggest that culture does, indeed, enhance the effectiveness of capitalism and its subsequent impact on growth . . . 
Claudia Williamson and Rachel Mathers

Political Survival and Endogenous Institutional Change

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Incumbent political leaders risk deposition by challengers within the existing political rules and by revolutionary threats. Building on Bueno de Mesquita, Smith, Siverson, and Morrow’s selectorate theory, the model here examines the policy responses of office-seeking leaders to revolutionary threats. Whether leaders suppress public goods such as freedom of assembly and freedom of information to hinder the organizational ability of potential revolutionaries or appease potential revolutionaries by increasing the provision of public goods depends, in part, on the sources of government revenues. Empirical tests show that governments with access to revenue sources that require few labor inputs by the citizens, such as natural resource rents or foreign aid, reduce the provision of public goods and increase the odds of increased authoritarianism in the face of revolutionary pressures. In contrast without these sources of unearned revenues, governments respond to revolutionary pressures by increasing the provision of public goods and democratizing.
Bruce Bueno de Mesquita, NYU and Alastair Smith, NYU

Economic Freedom, Culture and Growth

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How does economic freedom and culture impact economic growth? This paper argues that culture and economic institutions, specifically economic freedom, both play a role in economic development independently, but the strength of their impact can only be better understood when both are included in the growth regression. We find that, when both are included in the growth regression, the impact of culture is greatly diminished, while economic freedom continues to have a significant impact on economic growth. Our results suggest that economic freedom is more important than culture for growth outcomes, though the mechanisms through which culture affects growth warrant further investigation. We posit that culture may be more important for initial growth, diminishing in significance once the institutions of economic freedom have been established.
Claudia Williamson, NYU and Rachel Mathers, West Virginia University

Leader Survival, Revolutions and the Nature of Government Finance

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Leaders face multiple threats to their political survival. In additional to surviving the threats to tenure from within the existing political systems, which is modeled using Bueno de Mesquita et al’s (2003) selectorate theory, leaders risk being deposed through revolutions and coups. To ameliorate the threat of revolution, leaders can either increase public goods provisions to buy off potential revolutionaries or contract the provision of those public goods, such as freedom of assembly, transparency and free press, which enable revolutionaries to coordinate. Which response a leader chooses depends upon existing institutions and the structure of government finances . . . 
Alastair Smith, NYU and Bruce Bueno de Mesquita, NYU

Randomized Evaluation of Institutions: Theory with Applications to Voting and Deliberation Experiments

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We study causal inference in randomized experiments where the treatment is a decision making process or an institution such as voting, deliberation or decentralized governance. We provide a statistical framework for the estimation of the intrinsic effect of the institution. The proposed framework builds on a standard set-up for estimating causal effects in randomized experiments with noncompliance . . . 
Yves Atchade and Leonard Wantchekon

Underground Insurgency and Democratic Revolution

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We propose a model of the transition from an autocratic regime to either a liberal democracy or a new autocratic regime (e.g. a communist government). An underground organization votes on whether or not to hold a mass protest. If a protest is held, the organization members decide whether to put effort into the uprising. Higher effort makes regime change more likely, but it is individually risky. This creates the possibility, in principle, of high and low effort equilibria. But we show, using weak dominance arguments, that only the high effort equilibrium is “credible.” Thus, internal party democracy is shown to enhance the efficiency of political transitions . . . 

Do Remittances Promote Democratization?

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This paper presents evidence for international migration to have played a significant role in the Mexican democratization process. It argues that the non-taxability of remittances reduces an incumbent government's ability to maintain political patronage systems and, as a result, elections will become more competitive. The empirical results, using data from municipal elections in Mexico, support this theory. Estimating an instrumental variable probit model, I find that remittances significantly increase the probability of a party in opposition to the former state party PRI to win in a municipal election. Moving from the first to the third quartile of the remittances measure increases that probability in previously state party ruled towns by more than 15% when party preferences are controlled for.
Tobias Pfutze, New York University

The Political Economy of Normal Macroeconomic Pathologies.

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Recognizing that inflation and the macroeconomic policies that affect it can emanate from distributional conflicts in society, we examine the deep determinants of several nominal pathologies and related policy variables from a distributional perspective. We develop new instruments and use well- established existing instruments for these deep determinants and find that two deep determinants—societal divisions and democratic institutions—have a powerful and robust causal impact on nominal macroeconomic outcomes . . . 
Shanker atyanath and Arvind Subramanian

Capital Controls, Political Institutions, and Economic Growth

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The case study literature suggests that liberal international capital flows can have extremely different growth consequences depending on the political environment. Despite this, little systematic attention has been paid to how politics affects the relationship between capital controls and long term growth in a large-n context. Focusing on the conflict alleviating properties of democracy we demonstrate that authoritarian countries with a large number of societal divisions are negatively affected by capital controls, while neither democratic nor homogeneous countries suffer adverse growth effects from capital controls . . . 

Reliving the 50s: the Big Push, Poverty Traps, and Takeoffs in Economic Development

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he classic narrative of economic development -- poor countries are caught in poverty traps, out of which they need a Big Push involving increased investment, leading to a takeoff in per capita income -- has been very influential in foreign aid debates since the 1950s. This was the original justification for foreign aid. The narrative lost credibility for a while but has made a big comeback in the new millennium. Once again it is invoked as a rationale for large foreign aid programs. This paper applies very simple tests to the various elements of the narrative. Evidence to support the narrative is scarce . . .

Reliving the 50s: the Big Push, Poverty Traps, and Takeoffs in Economic Development

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The classic narrative of economic development -- poor countries are caught in poverty traps, out of which they need a Big Push involving increased aid and investment, leading to a takeoff in per capita income -- has been very influential in development economics since the 1950s. This was the original justification for foreign aid. The narrative lost credibility for a while but has made a big comeback in the new millennium. Once again it is invoked as a rationale for large foreign aid programs. This paper applies very simple tests to the various elements of the narrative. Evidence to support the narrative is scarce . . .
William Easterly, NYU

Social Cohesion, Institutions, and Growth

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Policy and institutional quality are to a large extent endogenous. While the truth of this statement is familiar to most development scholars, the implications of it have drawn relatively little empirical attention. Understanding more about this relationship matters, because ‘‘poor institutional quality’’ and ‘‘failure to implement better policies’’ are so frequently identified as the causes of growth collapses, endemic poverty, and civil conflict.
William Easterly, Jo Ritzen, and Michael Woolcock

Development, Democracy, and Mass Killings

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Using a newly assembled dataset spanning from 1820 to 1998, we study the relationship between the occurrence and cruelty of episodes of mass killing and the levels of development and democracy across countries and over time. We find that massacres are more likely at intermediate levels of income and less likely at very high levels of democracy, but we do not find evidence of a linear relationship between democracy and probability of mass killings. In the XXth century, discrete improvements in democracy are systematically associated with less cruel massacre episodes. Episodes at the highest levels of democracy and income involve relatively fewer victims . . . 

Artificial States

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Artificial states are those in which political borders do not coincide with a division of nationalities desired by the people on the ground. We propose and compute for all countries in the world two new measures of the degree to which states are artificial. One is based on measuring how borders split ethnic groups into two separate adjacent countries. The other measures how straight land borders are, under the assumption the straight land borders are more likely to be artificial. We then show that these two measures seem to be highly correlated with several measures of political and economic success.
Alberto Alesina, Harvard University; William Easterly, NYU; Janina Matuszeski, Harvard University

The Last Instance: Are Institutions the Primary Cause of Economic Development?

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Following North, neo-institutionalists claim that institutions are the ”primary” cause of economic development, ”deeper” than the supply of factors and methods for their use, what Marxists would call “forces of production.” Yet while the conclusion is different, the historical narratives differ little across these perspectives. How, then, are such conclusions derived? Can anything be said to be ”primary”? I conclude that “causal primacy” is an answer to an incorrectly posed question. Institutions and development are mutually endogenous and the most we can hope for is to identify their reciprocal impacts . . . 

What Can the Rule of Law Variable Tell Us About Rule of Law Reforms?

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The recent resurgence of optimism regarding the role of legal reforms in promoting development seems to be based in part upon cross country statistical analyses that purport to show causal relationships between variables measuring characteristics of legal institutions and variables measuring levels of various kinds of development. However, the persuasiveness of these analyses is limited by the quality of the legal data upon which they rely. As it turns out, many of the variables that are commonly used to measure respect for the rule of law, enforcement of property rights and contracts do not capture information capable of shedding light upon the potential impact of purely legal reforms . . . 
Kevin Davis, School of Law, NYU

What Can the Rule of Law Variable Tell us About Rule of Law Reforms?

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In 2001 per capita income in Haiti was $480, the infant mortality rate was seventy-nine per 1000 live births and the illiteracy rate (age fifteen and over) hovered around fifty percent. By comparison, in the United States, less than two hours flying time away, the per capita in- come was $34,280, the infant mortality rate was seven per 1000 live births, and the illiteracy rate was negligible. Understanding the reasons why these sorts of disparities in important measures of development arise and persist is one of the greatest challenges in all of the social sciences . . . 
Kevin Davis