How Bad Can a Government Be? Neighborhood Constraints and the Quality of National Governments

Abstract

Poorly governed (e.g., repressive) countries tend to be located near other poorly governed countries, and well governed countries near other well governed countries. The previous literature, by identifying country characteristics (e.g., ethnic fractionalization) that may influence government quality, provides one potential explanation: Neighboring countries tend to be similar with respect to those characteristics. In this paper, we provide a different, though complementary, explanation: The ability of a ruler to implement policy that displeases the country's populace is constrained by opportunities for residents to relocate to other countries nearby. To generate testable predictions about the effects of such "neighborhood constraints" on government quality, we develop a simple theoretical model. We test the model's predictions using cross-sectional and panel data, controlling for other determinants of government quality. The empirical results support the model's predictions.

Keywords: Institutions, government quality

JEL Classification: D72, D73