Exploring Non-Linear Effects of Political Institutions on Economic Institutions

Abstract

Recent research has explored the determinants of economic freedom, an important measure of institutional quality. Elsewhere, some scholars have posited a negative relationship between the quality of economic institutions and democracy, at very high levels of democracy. This paper disaggregates the Polity IV index into a vector of twenty dummy variables to understand how differing degrees of democracy and autocracy may impact economic freedom, thereby leaving open the possibilities for non-linearities to express themselves in the analysis. Little evidence is found of any relationship in the long run, except possibly that very autocratic political institutions may have a negative effect.

Keywords: Political Institutions, Economic Institutions, Economic Freedom of the World, Polity IV, Democracy

JEL Classification: P16