New Evidence on the Institutional Causes of Economic Growth: Using Peer Pressure to Unbundle Institutions across Countries

43 Pages Posted: 19 Dec 2019

See all articles by Savva Shanaev

Savva Shanaev

Northumbria University

Roseline Wanjiru

University of Northumbria at Newcastle

Date Written: December 2, 2019

Abstract

This study presents a new framework of assessing the causal effect of institutions on economic growth via exploiting the exogenous variation in institutions triggered by “peer pressure” exerted on governments by other states, affecting policy decisions and the environment national and international businesses operate in. The applied method reinforces the importance of institutional factors for economic outcomes and allows to effectively address the data quality and instrument validity concerns surrounding earlier studies. Most importantly, the “peer pressure” method allows to distinguish between influences of various institutions, answering not only the question whether, but also which institutions do matter for growth. The study shows that the proposed method has significant power to “unbundle institutions” and finds that property rights protection and financial freedom are more important for growth than democracy, constraint on the executive, legal origins, or business freedom, even when controlled for human capital. The developed method has significant applicability in future research of institutional and cultural impact on international business and economic outcomes.

Keywords: economic growth, instrumental variables, institutions, international trade, political pressure, property rights

JEL Classification: C26, E02, O43, O47

Suggested Citation

Shanaev, Savva and Wanjiru, Roseline, New Evidence on the Institutional Causes of Economic Growth: Using Peer Pressure to Unbundle Institutions across Countries (December 2, 2019). Available at SSRN: https://ssrn.com/abstract=3497642 or http://dx.doi.org/10.2139/ssrn.3497642

Savva Shanaev (Contact Author)

Northumbria University ( email )

Pandon Building
208, City Campus East-1
Newcastle-Upon-Tyne, Newcastle NE1 8ST
United Kingdom

Roseline Wanjiru

University of Northumbria at Newcastle ( email )

Pandon Building
208, City Campus East-1
Newcastle-Upon-Tyne, Newcastle NE1 8ST
United Kingdom

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