Working Paper: CEPR ID: DP8871
Authors: Markus Brckner; Mark Gradstein
Abstract: In this paper, we study the causal effect of income growth on institutional quality in the 1984-2007 cross country panel. To focus on exogenous income windfalls, we employ international oil price shocks as an instrument for income growth. While national incomes and measures of institutional quality are highly correlated, our analysis fails to identify a clear pattern of a causal effect, and estimations often yield statistically insignificant coefficients, albeit with positive signs. We then explore the possibility that fixed country characteristics may mediate the effect of income on institutions. Focusing on measures of ethnic heterogeneity, we find that ethnic polarization acts adversely as a mediating factor in this regard.
Keywords: income growth; institutional quality
JEL Codes: O11
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Ethnic polarization (J15) | (Income growth -> Institutional quality) (O43) |
| Income growth (O49) | Corruption (D73) |
| Income growth (O49) | Law and order (K40) |
| Oil price shocks (Q43) | Income growth (O49) |
| Income growth (O49) | Institutional quality (I24) |
| Income growth (O49) | Political risk index (F31) |