Lone Wolves, Sleeping Elephants or Predator Hawks? Institutional Shocks and Counterfactual Long-Run Development Paths

64 Pages Posted: 1 Jun 2018

See all articles by Nuno Garoupa

Nuno Garoupa

George Mason University - Antonin Scalia Law School, Faculty

Rok Spruk

University of Ljubljana - Faculty of Economics

Date Written: May 20, 2018

Abstract

This paper examines the importance of institutional shocks to long-run development. Our empirical method offers a clear empirical test to distinguish between three models of institutional shocks. We define gradual institutional change without a major shock, institutional change imposed by a major shock, and structural breakdowns. Drawing on several case studies from a sample of 56 countries for the period 1820-2015, we identify a series of institutional shocks and construct a synthetic counterfactual scenario of long-run development in response to a shock. Our evidence suggests that the long-run impact of institutional shocks on growth and development depends on the initial and pre-shock country-level characteristics. Gradual institutional changes help foster long-run development while changes imposed by a shock produce a large but temporary deviation from the long-run growth equilibrium. By contrast, institutional breakdowns produce a permanent change of long-run growth path, and depend on the nature of the shock.

Keywords: long-run growth, institutions, synthetics

JEL Classification: N10, O10, O43, O47, O57

Suggested Citation

Garoupa, Nuno and Spruk, Rok, Lone Wolves, Sleeping Elephants or Predator Hawks? Institutional Shocks and Counterfactual Long-Run Development Paths (May 20, 2018). Available at SSRN: https://ssrn.com/abstract=3181899 or http://dx.doi.org/10.2139/ssrn.3181899

Nuno Garoupa (Contact Author)

George Mason University - Antonin Scalia Law School, Faculty ( email )

3301 Fairfax Drive
Arlington, VA 22201
United States

Rok Spruk

University of Ljubljana - Faculty of Economics ( email )

Kardeljeva ploscad 17
Ljubljana, 1000
Slovenia

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