Democratic Institutions and Social Welfare

• In Event: Inequality

Abstract

It is common knowledge that politics shapes the economy, but how? A long line of literature explores how political institutions influence economic outcomes and the distribution of resources. In a recent paper, Acemoglu et al. (JPE 2019) seek to demonstrate that democracy causes growth. However, the literature suffers from two drawbacks. First, it is often difficult to manage endogeneity problems given obvious two-way influence between politics and the economy. Second, most studies do not disaggregate democracy in ways that generate testable propositions about causal mechanisms. Our project seeks to advance this important but flawed literature by reconceptualizing both independent and dependent variables.

We deploy a combination of data bases to specify and measure independent variables. In addition to Varieties of Democracy (VDem), we use a novel data base that disaggregates elements of democratic institutions with which to track the effects of politics on the economy. This allows us to disentangle the impact of institutions on economic growth and inequality. Instead of using an aggregate political index, we test the effects of the number of parties, party strength, and other features of democratic systems that are associated with the capacity to compete over, and implement, programmatic policies rather than supply clientelist benefits to discrete groups. To deal with omitted variable bias, we deploy a difference-in-difference specification with time and country fixed effects and an extended set of covariates.

With respect to the dependent variable, we use the methodology proposed by Jones and Klenow (2016) to study the impact of political institutions relations on welfare. Their macroeconomic-founded framework allows us to estimate a welfare measure beyond GDP that can be compared across time and place. This allows us to deal with endogeneity concerns by accounting for life expectancy, the value of leisure, and the inequality of resources, which are all factors affected by political institutions. We show that in countries with better political institutions people enjoy higher levels welfare. Our preliminary results suggest strong effects of electoral competition between disciplined political parties on total factor productivity (TFP).

Sources:
Beyond GDP? Welfare across countries and time. C. Jones C. and Peter Klenow (American Economic Review, 2016)
Democracy Does Cause Growth. D. Acemoglu, S. Naidu, P. Restrepo and J. Robinson (Journal of Political Economy, 2019)

Authors

• Alexander Kustov, University of North Carolina at Charlotte

• Frances McCall Rosenbluth, Yale University

• Ian Shapiro, Yale University

• Maikol Cerda, Yale Jackson Institute for Global Affairs