Why Not Adopt Better Institutions?

Abstract

According to Acemoglu, Robinson and Johnson (2002), institutional divergence prior to the Industrial Revolution is the fundamental cause of differences in income levels across countries. To quantify the impact of institutions on long-run growth rates that drive the differences in levels, we adapt their baseline regression. We estimate that improving institutional quality by one standard deviation in their model would have improved a country's average annual growth rate by only 0.4% over the period from 1820 to 1995. Finite-lived leaders may have preferred the private benefits of expropriation to modest short-run increases in their country's growth rate, despite the clear long-run benefits of improving institutional quality.

Keywords: Institutions, Long-run Growth, Political Economy, Development

JEL Classification: O4, N1, E0