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AbstractIn this paper, we emphasize the role of institutions as the underlying basis for economic and social activity. We describe and compare different institutional classification systems, which is rarely done in the literature, and show how to empirically operationalize institutional concepts. More than 30 established institutional indicators can be clustered into three homogeneous groups of formal institutions: legal, political and economic, which capture to a large extent the complete formal institutional environment of a country. We compute the latent quality of legal, political and economic institutions for every country in the world and for every year. On this basis, we propose a legal, political and economic World Institutional Quality Ranking, through which we can follow whether a country is improving or worsening its relative institutional environment. The calculated latent institutional quality measures can be especially useful in further panel data applications and add to the usual practice of using simply one or another index of institutional quality to capture the institutional environment. We make the Institutional Quality Dataset, covering up to 197 countries and territories from 1990 to 2010, freely available online.

In this paper we emphasize the role of institutions in economic analysis. We describe and compare different institutional classifications systems, which is rarely done in the literature, and show how to operationalize institutional classification based on the subject category, as the most appropriate one. More than thirty established institutional indicators can be clustered into three homogenous groups of formal institutions: legal, political and economic, which capture to a large extent the complete formal institutional environment of a country. We compute the latent quality of legal, political and economic institutions with factor analysis for every country in the world and for every year, relative to the values of others. We propose aWorld Institutional Quality Ranking, through which we can follow whether a country is improving or worsening its relative institutional environment. The calculated latent institutional qualities can be especially useful in further panel data applications, and add to the usual practice of using simply one or another index of institutional quality to capture the institutional environment, so we make the Institutional Quality Database freely available online.

This paper investigates the impact of foreign aid on the quality of institutions in recipient countries. Our identification strategy exploits the shift in US foreign policy due the attacks on the World Trade Center on September 11th, 2001 as a quasi-natural experiment. The associated change in strategic importance of certain countries is resembled in the pattern of foreign aid flows. We estimate the impact of US foreign aid on different measures of institutional quality in a cross-country panel data set of developing countries. Our results indicate that foreign aid impacts different dimension of a country's institutions: When focusing on the rule of law aid seems to have a detrimental effect. However, the tax burden imposed on the citizens in recipient countries seems to be reduced by aid payments. When looking at the general level of democratization, we cannot find any conclusive results.

Poorer countries have a much smaller public sector and correspondingly a smaller tax burden than richer countries, yet, their economic performance has not been necessarily better. Using a simple model, this paper suggests that the growth and welfare effects of taxation are mediated through institutional quality; consequently, optimal tax levels increase with improved institutional quality. The paper then employs firm-level perceptions on the quality of public services and on the tax burden to test some of the model's predictions. Consistent with these predictions, the paper finds that a higher level of institutional quality bolsters positive perceptions of the quality of public services while at the same time moderating the view of taxes as an obstacle to growth.

AbstractWe use the Economic Freedom Index to characterize the institutions of the Athenian city-state in the fourth century BCE. It has been shown that ancient Greece witnessed improved living conditions for an extended period of time. Athens in the fourth century appears to have fared particularly well. We find that economic freedom in ancient Athens is on level with the highest ranked modern economies such as Hong Kong and Singapore. With the exception of the position of women and slaves, Athens scores high in almost every dimension of economic freedom. Trade is probably highly important even by current standards. As studies of contemporary societies suggest that institutional quality is probably an important determinant of economic growth, it may also have been one factor in the relative material success of the Athenians.

This paper uses new data on fiscal transparency for a cross-section of countries; these data possess several advantages. First, the data are based on in-depth reports using a standardized methodology and protocol. Second, this study covers 82 countries, more than previous comparable studies. Third, the fiscal measures used have been obtained with the collaboration of government authorities, which makes them particularly reliable. Finally, the data collection has been undertaken at a high level. These new data permit examination of a relevant but little-studied issue, the role of institutional quality in a country's fiscal transparency. It is shown that there is in fact a causal relationship between institutions and transparency. The findings are robust to changes in specification and a host of transparency sub-measures.

There is a growing consensus among economists and policy makers that institutions matter for economic development and that institutional reforms should be a priority for developing economies. Considering the emphasis on institutional reforms, this study asks whether a catch-up in institutional quality has occurred across countries. The study uses data on 81 countries from 1985 to 2010 and tests the catch-up hypothesis using three different measures of institutional quality that capture both political and economic dimensions of institutions. The results indicate that a catch-up in economic institutional quality has occurred and that most countries with weak economic institutions have a higher rate of change than that of countries with strong economic institutions. In contrast, for political institutions, the catch-up process lasts only a few years.