Institutions Matter, but in Surprising Ways: New Evidence on Institutions in Africa

Estimation of the effects of institutions on long-term growth is severely limited by the endogeneity of institutions to the choices of governments. I thus approach the model from the household level and estimate the effects of aggregate institutions on household wealth. Under the benign assumption that institutions are exogenous to household choices this model gives unbiased estimates of multiple institutional variables. Issues then arise of the basic concepts and measurements of institutional variables. I revisit these issues and present new regional level institutional variables that are representative of 151 regions in thirteen African countries and measure clear concepts of institutions. I find that regional level institutions have significant effects on household wealth in a nonlinear fashion. Fear of crime, expectations of law enforcement and corruption at multiple levels are all estimated to have significant nonlinear effects on household wealth.