Institutional Instability and Economic Growth Revisited
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2024-08-21
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en
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Over the past three decades, the New Institutional Economics have established that institutions significantly influence economics outcomes. However, the effect of institutional instability remains theoretically ambiguous: Instability can hamper the economy by increasing uncertainty and transaction costs. Yet, it can also benefit economic outcomes by enabling improvements in institutional quality, for example, via Hayekian experimentation. To date, only a few studies have examined the relationship between institutional instability and economic outcomes, yielding different conclusions about whether and when the positive or negative effects dominate. This thesis revisits this relationship, testing whether it follows an inverted-U-shape, with moderate levels of instability maximizing economic performance. Institutional instability was measured by calculating the multivariate dynamic complexity in the Varieties-of-Democracy project data that covers a broad range of political and legal institutions. Fixed-effects regressions using panel data from 116 countries between 1960 and 2019 indicated that institutional instability and economic growth were negatively associated, particularly in poorer countries. Conversely, the analysis did not provide support for an inverted-U-shaped relationship. Ultimately, the negative relationship was only significant when studying time periods of 20 but not of 10 years, suggesting that the adverse effects of institutional instability on economic performance only predominate in the long term.
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Faculteit der Managementwetenschappen