Democracy and Policy Stability

55 Pages Posted: 18 Oct 2007

See all articles by Pushan Dutt

Pushan Dutt

INSEAD - Economics and Political Sciences

Ahmed Mushfiq Mobarak

Yale School of Management; Yale University - Cowles Foundation

Multiple version iconThere are 2 versions of this paper

Date Written: September 2007

Abstract

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.

Suggested Citation

Dutt, Pushan and Mobarak, Ahmed Mushfiq, Democracy and Policy Stability (September 2007). INSEAD Business School Research Paper No. 2007/50/EPS. Available at SSRN: https://ssrn.com/abstract=1021270 or http://dx.doi.org/10.2139/ssrn.1021270

Pushan Dutt (Contact Author)

INSEAD - Economics and Political Sciences ( email )

1 Ayer Rajah Avenue
Singapore, 138676
Singapore
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HOME PAGE: http://faculty.insead.edu/pushan-dutt/

Ahmed Mushfiq Mobarak

Yale School of Management ( email )

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P.O. Box 208200
New Haven, CT 06520-8200
United States
203-432-5787 (Phone)

HOME PAGE: http://mba.yale.edu/faculty/profiles/mobarak.shtml

Yale University - Cowles Foundation

Box 208281
New Haven, CT 06520-8281
United States

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