Spatial Spillovers in the Development of Institutions

Abstract

We examine spatial spillovers between countries in the development of institutions. Our dependent variables are three measures of institutions that relate to politics, law, and governmental administration. The major explanatory variable on which we focus is a spatial lag of the dependent variable, that is, the level of similar institutions in bordering countries. We also consider determinants of institutions that have been previously examined in the literature, such as legal origin, religious groupings, ethnolinguistic fractionalization, resource base, and initial level of GDP per capita. Our framework of analysis is a spatial panel data model. Because of missing observations, special problems arise in estimating our spatial model. These problems are explicitly recognized in our estimation procedure, which implements new results in spatial econometrics. Direct spatial spillover effects between countries are statistically significant and economically important. We provide evidence of the size of the general equilibrium (direct and indirect) effects of spatial spillovers by examining a counter-factual - the non-existence of the Soviet Union. Our central conclusions are bolstered by robustness exercises that involve varying the treatment of GDP per capita, running separate yearly cross-sections, including fixed effects, and using an alternative specification of spatial weights.

Keywords: institutions, spatial econometrics, governance, neighborhood effects, spatial spillovers

JEL Classification: C5, O1, O5, P5