Democracy and Policy Stability

39 Pages Posted: 11 Sep 2007 Last revised: 14 Jul 2015

See all articles by Pushan Dutt

Pushan Dutt

INSEAD - Economics and Political Sciences

Ahmed Mushfiq Mobarak

Yale School of Management; Yale University - Cowles Foundation

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Date Written: July 14, 2015


The strong negative link between democracy and output volatility documented by Rodrik (2000) and others stands in sharp contrast to the lack of consensus on the democracy-growth relationship. To explain stable growth performance in democracies we characterize political systems in terms of the distribution of political power across groups, and show that in a world where the qualities of available policy alternatives are uncertain, greater democracy (i.e. decentralization of decision-making authority) leads to more stable policy choices. We design an empirical test of this mechanism by creating measures of the inter-temporal variability in fiscal and trade policies for a panel dataset of 92 countries. In an array of specifications (cross-sectional and panel OLS, fixed effects, random effects, instrumental variables), under 5 different measures of democracy and using sharp episodes of democratizations in a difference in difference, we show that policy choices are significantly more stable over time in democracies. This mechanism explains a large part of the negative link between democracy and output volatility.

Keywords: Democarcy, Policy Volatility

JEL Classification: P16, D72, E62, F13

Suggested Citation

Dutt, Pushan and Mobarak, Ahmed Mushfiq, Democracy and Policy Stability (July 14, 2015). Available at SSRN: or

Pushan Dutt (Contact Author)

INSEAD - Economics and Political Sciences ( email )

1 Ayer Rajah Avenue
Singapore, 138676
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Ahmed Mushfiq Mobarak

Yale School of Management ( email )

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New Haven, CT 06520-8200
United States
203-432-5787 (Phone)


Yale University - Cowles Foundation

Box 208281
New Haven, CT 06520-8281
United States

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