Colin O'Reilly

Colin W. O'Reilly

Research

The Expansive Corridor: Testing Acemoglu and Robinson (2019) (with Ryan Murphy) Journal of Development Studies. 49(7): 1060-1075. 2023.

Link: The Expansive Corridor: Testing Acemoglu and Robinson (2019) [SSRN]
Acemoglu and Robinson (2019) create a compelling narrative concerning the relationship between the power of states, the power of societies, and economic development, illustrated with a series of historical vignettes. Using a recently constructed historical dataset of state capacity, we provide a series of formal and informal tests of their hypothesis. We first visualize the historical paths of the strength of society and the strength of the state for each country so as to operationalize the claims of Acemoglu and Robinson. We then measure whether the balance of the strength of society and the strength of the state is predictive of improvements in both. We find very little evidence in favor of Acemoglu and Robinson (2019).

JEL Codes: O43; H10; N40

Keywords: The Narrow Corridor; Civil Society; State Capacity; Social Capital; Institutional Development

An Index Measuring State Capacity, 1789-2018 (with Ryan H. Murphy) Economica. 89(355): 713-745. 2022.

This paper contributes to the literature on state capacity by developing a method that yields an index of state capacity with far more comprehensive data coverage across time and countries than has been possible previously. Unlike narrower measures of fiscal capacity or legal capacity, the index is more comprehensive, using data from the Varieties of Democracy dataset on fiscal capacity, a state’s control over its territory, the rule of law, and the provision of public goods used to support markets. Like the previous literature, it demonstrates that the historical prevalence of warfare predicts state capacity. Several exercises are performed to demonstrate the validity of the index in measuring state capacity.

Keywords: State Capacity; Fiscal Capacity; Legal Capacity; Rule of Law; Varieties of Democracy; Institutional Development

JEL Codes: H11; O43; H20; P14

Data and Code

The Economic Theory of Regulation and Inequality (with Dustin Chambers)
Public Choice 198: 63-78. 2022.

Stigler (1971) proposed that regulation benefits politically influential interest groups rather than advancing the public interest. The Stiglarian perspective predicts that regulation raises barriers to entry that limit competition and create economic rents for incumbents. Apart from the direct economic harm of such policies, regulation also generates unintended consequences. One such unintended consequence ushered by anticompetitive rules is the widening of income disparities. This article therefore surveys the growing empirical literature that studies whether regulation ultimately exacerbates income inequality. Beginning with the literature on entry and start-up regulation, we find that these rules, as predicted by Stigler, limit entry and dampen entrepreneurship. Moreover, recent studies also indicate that these regulations are associated with higher income inequality. We also review the literature on occupational licensure. Consistent with Stigler (1971), the literature chronicles widespread use of barriers to entry in labor markets, which have documented regressive effects on the distribution of income. Finally, we review research on financial regulation, in which studies have shown that some financial regulations are associated with less entrepreneurship and higher income inequality. Taken together, the recent empirical literature buttresses and extends the implications in Stigler (1971). Regulation tends to benefit incumbents by limiting entry of economic participants, be it firms or workers, and exacerbates income inequality.

JEL codes: D31, J38, K20

Keywords: income inequality; regulation; regressive effects; entrepreneurship, dynamism, barrier to entry

Applying Panel Vector Autoregression to Institutions, Human Capital, and Output [SSRN link] (with Ryan Murphy) Empirical Economics 57: 1633–1652. 2019.

We bridge two literatures by applying Panel Vector Autoregression (PVAR) to human capital, political institutions, economic institutions, and economic output per capita. Institutions and human capital have competed within the scholarly literature as hypotheses explaining the origins of economic growth. Elsewhere, our measure of economic institutions, the Economic Freedom of the World index, has recently been explored extensively as a dependent variable, whereas previously it had been used as an explanatory variable. We wish to measure the interrelationships between political and economic institutions, as well as their interrelationships with economic output and human capital, in contrast to literature which emphasizes the importance of political institutions alone. We explore these interrelationships in a PVAR model, finding that, descriptively at least, higher quality economic institutions are associated with more output. We also find weak evidence that higher quality political institutions are associated with less output and less education. We also find a robust positive effect of education on the quality of economic institutions. In performing this analysis, we contribute to the literature on the institutions and human capital debate, as well as to the literature on the causes of free economic institutions. 

Keywords: Economic Growth, Political Institutions, Economic Institutions, Human Capital
JEL Codes: O43; P51

War and the Growth of Government [SSRN link] (with Dr. Benjamin Powell) European Journal of Political Economy. Vol. 40: 31-41. 2015.

Does war cause the growth of government? This paper empirically examines how wars impact the size and scope of government using a panel of all wars from 1965 to 2010.  Higgs (1987) gives us reason to believe that wars may permanently increase government size and scope (the ratchet effect) while Olson (1982) describes how wars can dislodge interest groups and allow for market liberalizing reforms. We find that wars permanently expand the scope of government regulation but do not impact government size systematically across the countries we study.

Keywords: War, Economic Freedom, Size of Government, Institutional Change
JEL Classification: H11, H12, N40, P48

​Household Recovery from Internal Displacement in Northern Uganda [SSRN link] World Development. Vol 72: 203-215. 2015

Northern Uganda experienced violent conflict for over 15 years, resulting in the internal displacement of over 1,800,000 Ugandans. In the five years that followed a cease fire agreement in 2006 nearly all the displaced persons and refugees returned home. The difference in the growth of consumption between returnee households and a comparison group of non-displaced households is estimated using propensity score matching. After an initial shock to consumption and assets upon return, returnee households experience a period of catch-up growth. These results contribute to understanding the dynamics of recovery from displacement and have implications for the policy response during recovery.

Keywords: Civil War, Post-Conflict Recovery, Internal Displacement, Migration, Uganda, Refugees
JEL Classification: O12, O15, O55, E21

Journal Articles

Religious institutions shape beliefs and norms of behavior which can influence political outcomes. In this study we provide rigorous empirical evidence of electoral influence through the channel of religious institutions. By leveraging spatial regression methods, we demonstrate that Mazu temples influence electoral behavior through a localized process. The density of urban Mazu temples in Taiwan, which are subject to influence from mainland China, is associated with an increase in vote share for the pro-China KMT party in their neighborhoods. However, the influence on voters in urban and village areas is not homogeneous. In contrast to urban temples, the relationship between village Mazu temples and the electoral results is insignificant. Our results are important contributions to several strands of literature at the intersection of political science and the study of religion.

Keywords: Folk Religion, Mazu, Electoral Intervention, Cross-Strait Relations, Spatial Regression

Link: Freedom Through Taxation: The Effect of Fiscal Capacity on the Rule of Law [SSRN]

​​This paper explores the effects of fiscal capacity on the rule of law. Following the Besley and Persson (2009) model exploring complementarities between fiscal capacity and legal capacity, we test the relationship using fiscal capacity and rule of law data from the Varieties of
Democracy dataset. We leverage the lengthy time-series found in the dataset by employing the common correlated effects (CCE) estimator and the dynamic common correlated effects (DCCE) estimator to supplement standard panel methods. Unlike the widely used fixed effects method,
the CCE and DCCE methods adjust for the presence of econometric issues including crosssectional dependence, heterogeneous slopes and unobservable common factors that plague the error-structure in panel data. Consistent with Olson’s model of the stationary bandit and Besley
and Persson (2009), we conclude that innovations in fiscal capacity have positive, non-trivial effects on the rule of law.

Keywords: Fiscal Capacity; Legal Capacity; Rule of Law; Institutional Development; State Capacity; Stationary Bandit
JEL Codes: O43; K00; P10; H20

Link: Violent Conflict and the Strength of Civil Society [SSRN] 

Leading theories of institutional and economic development emphasize the role of informal institutions and the strength of civil society. Well identified household level studies show that exposure to violent conflict may increase pro-social behavior, such as participation in social groups and contributions to public goods. Evidence suggests that civil war may influence formal institutional quality at the country level, however, evidence that violence can change civil society or informal norms at the county level is sparse. In this study I apply the synthetic control method to model the impact of violent conflict on the strength of civil society at the country level. I focus on five countries in which existing micro-level evidence suggests that exposure to violence changes behavior or informal norms: Sierra Leone, Burundi, Uganda, Nepal and Liberia. Results of the synthetic control analysis suggests that civil war is associated with stronger civil society in at least some contexts

Keywords: Institutional Change, Violent Conflict, Informal Institutions, Civil Society
JEL Codes: D74, O17, P48, P50

Link: Barriers to Entry, Entrepreneurship, and Income Inequality within the United States
[SSRN version]

Regulations can create economic rents for incumbents at the expense of new entrants, thereby limiting entrepreneurship and exacerbating income inequality. Cross-country studies have shown that higher costs to starting a business tends to slow new firm formation (Chambers and Muenmo 2019) and that an unfavorable environment for business can increase poverty and income inequality (Chambers, McLaughlin, et al. 2019a; Djankov et al. 2018). We build on the current literature by testing whether barriers to starting a business at the state and city level in the United States are associated with changes in entrepreneurship and income inequality. Results show that there is a negative association between barriers to starting a business and the rate of firm exit. The coefficients of interest are statistically significant in state level regressions but not in city level regressions. We find only limited evidence that barriers to starting a business are associated with income inequality.

Keywords: Barriers to Entry, Cost of Starting a Business, Regulation, Entrepreneurship, Income Inequality
JEL codes: D63, D73, L26, L51

Link: Regulation and Income Inequality in the United States
[Mercatus Working Paper version]

Income inequality in the United States has risen over the past several decades. Over the same​
period, federal regulatory restrictions have increased. An emerging literature shows that
regulations can have regressive effects on the distribution of income, exacerbating inequality.
The Federal Regulation and State Enterprise (FRASE) index quantifies the regulatory restrictions
that apply to each US state by industrial composition. We construct a panel of 50 US states from
1997 to 2015 to test whether states exposed to more federal regulatory restrictions have higher
levels of income inequality. The results indicate that a 10 percent increase in federal regulation is
associated with an approximate 0.5 percent increase in income inequality as measured by the
Gini coefficient. When states are rank-ordered by average Gini coefficient, a 0.5 percent increase
in income inequality will typically result in a two-position decline in state ranking.​

Keywords: Regulation, Income Inequality, FRASE, Regressive Effects.
JEL Codes: D31, D63, L51

Link: Tax Policy and Charitable Giving

​Studies of how the 2017 Tax Cuts and Jobs Act (TCJA) will affect charitable giving narrowly focus on the increase in the standard deduction. Based on these studies, the media and policy analysts warned that the TCJA would lead to a sharp decrease in charitable giving. However, these predictions did not fully account for some of the nuances in the tax code and the political economy of changes to tax policy. We explain that a richer analysis includes the political response of interest groups. Tax provisions other than changes to the standard deduction, such as an increase in the Adjusted Gross Income limit, mean that the TCJA may change the composition of giving but that it is unlikely to have a large impact on overall giving. To supplement our analytical narrative, we present statistics on the pattern of charitable giving and estimate a predictive autoregressive model of overall charitable giving. The results show that the change in giving after the implementation of the TCJA cannot be distinguished from zero. We conclude that misleading interpretations about the effect of the TCJA on overall charitable giving are due to the omission of political economy from the analysis.

Keywords: TCJA, standard deduction, charitable giving, interest groups, public choice
JEL codes: H21, H24, D64, D72

Link: Violent Conflict and Institutional Change 

​​Violent conflict such as civil war may influence institutional quality by changing the political equilibrium or by changing preferences and norms. This study presents empirical evidence that in some cases civil war deteriorates institutional quality. By applying the synthetic control method to 25 cases of civil war between 1960 and 2010 I construct the counterfactual path of institutional quality in the absence of civil war. The effects of civil war are heterogenous, but for a substantial minority of cases civil war appears to deteriorate institutional quality. These findings have implications for post-civil war economic recovery as well as long run economic development.

Keywords: Institutional Change, Institutional Quality, Violent Conflict, Civil War, Economic Development.
JEL Codes: D74, O17, P48, P50

Several studies find that liberalizing financial markets is associated with lower inequality, possibly due to increasing access to credit to those at the bottom of the income distribution. Others such as de Haan and Sturm (2017) find that financial market liberalization increases inequality. One explanation for the divergent results is that liberalization or deregulation is a product of the political process. If incumbents in the financial industry hold political power, they may counter efforts to deregulate by lobbying for re-regulation to protect their incumbency. Using an alternative measure of liberalization in a large panel of countries, we confirm the positive association between inequality and liberalization found by de Haan and Strum (2017). Further, our results indicate that the positive association between inequality and liberalization decreases in magnitude and significance once a measure of banking supervision regulation is included in the analysis. We find that banking supervision regulation is positively associated with income inequality, suggesting that so-called deregulation is actually re-regulation – a finding similar to Manish and O’Reilly (2019). We conclude that one plausible explanation for the positive association between in income inequality and financial market liberalization is that the process of deregulation is often captured by incumbents.

Keywords: Regulation, Inequality, Regulatory Capture, Liberalization, Re-regulation
JEL Codes: D31; D63; D72; L51; F65

Link: Assessing State Capacity Libertarianism  [SSRN Link]

Cowen (2020) argues for a redirection of effort towards “State Capacity Libertarianism,” which keeps the core of policy proposals from libertarianism intact while emphasizing a select set of policies aimed at furthering economic growth. These policies center on the ability of the state to accomplish that which it sets out to accomplish, i.e. state capacity. This paper interprets Cowen’s proposal in terms of an interaction between economic freedom and state capacity. Using four measures of state capacity, it finds that state capacity and economic freedom are neither additive nor complementary. Rather, they are substitutes for one another. These results are uncomfortable for conventional libertarianism, for the advocates of state capacity, and for State Capacity Libertarianism itself. One measure of state capacity we use is a novel measure using data from the Varieties of Democracy dataset, which may be useful for researchers in other contexts.


Keywords: Economic Freedom, Institutional Quality, State Capacity, State Building
JEL Classification: O43, P50, P10

Link to: The champions of capitalism? National leaders and the institutional channel

Easterly and Pennings (2018) study whether economic growth is attributable to national leaders. They find only a select few leaders with growth rates during their tenure that can be statistically distinguished from zero. We compare two sets of leaders – those whose growth rates Easterly and Pennings find to be statistically greater than zero and those they find to be statistically less than zero. We find that leaders who performed better presided over a change in economic freedom roughly a half of a point better than those who performed poorly, suggesting the difference in economic performance may in part have been through the institutional channel. The effect is large, with many specifications corresponding to more than a half of a standard deviation across countries today.

Keywords: Autocracy; Economic freedom; Leaders; Ideology; Institutions
JEL Codes: O43; N40

Link to: Entry Regulations and Income Inequality at the Regional Level

We combine entry regulation data from the World Bank’s subnational Doing Business Index with regional income inequality from the OECD to test relationship between entry regulation and income inequality at the subnational level.  Controlling for other factors known to affect income inequality, we find that a 1 percentage point increase in entry costs (expressed as a percentage of national per capita income) is associated with a 3.4% increase in regional inequality (measured via the 80/20 income percentile ratio).  These results suggest that uniform national regulations may have disparate regional effects, as compliance costs may vary by subnational region.

 Keywords: income inequality; regulation; entry regulations; Doing Business; regional
JEL Codes:  D31, J38, K20

Link to: ​Banking regulation, regulatory capture and inequality

​​Regulation of the banking and finance industry may lead to a more equal distribution of income if regulators pursue goals in the public interest. Alternatively, the economic theory of regulation predicts that regulatory and supervisory processes may be captured by the banking industry, leading to policies that promote the industry’s interests. The liberalization of the banking and finance sector since the 1980s has produced more intense banking supervision and prudential regulation. In this study we find that banking supervision regulation is associated with greater income inequality. These findings are consistent with the economic theory of regulation. We interpret these results as evidence that regulatory capture in the banking and finance industry can have pernicious effects on the distribution of income.
 
Keywords: Regulation, Inequality, Regressive Effects, Regulatory Capture, Liberalization, Banking Supervision
JEL Codes: D31; D63; D72; D73; L51; F65

Link to: And the IMF Said, Let There Be Data, and There Was Data: Private Capital Stocks in the Eastern Bloc 

The International Monetary Fund has recently published a dataset on public and private capital stocks for 170 countries from 1960-2015 using the perpetual inventory methodology. Following a reckless assumption, opaquely imposed, the dataset likely overstates levels of private investment as a percentage of total investment in former Eastern bloc countries, and thereby likely overstates their private capital stocks. This comment explores the nature and implications of the assumption, and suggests that, in light of the problem, the scope of the IMF project be significantly diminished to address the issue.

Keywords: National Accounts; Investment and Capital Stock Dataset; Public Capital Stock; Public Investment; International Monetary Fund
JEL Codes: H54; P33; N10

Link to Post-Genocide Justice: The Gacaca Courts

Legal institutions are an important determinant of economic performance, particularly in the post-conflict context. In the aftermath of the Rwandan genocide the crippled judicial system failed to administer justice in a timely manner. A modified version of the traditional Gacaca courts were introduced to hear cases from the backlog of over 100,000 genocide suspects. We find that the Gacaca courts performed well as a justice system given the constraints faced. The Gacaca courts generated valuable information about the genocide suspects and increased access to the justice system. The introduction of the Gacaca courts improved the performance of the formal justice system and facilitated post-conflict economic performance.
 
Keywords: Law and Economics, Dispute Resolution, Rwanda, Comparative Institutions 
JEL Codes: K40, K41, O43

Link to: Do Institutions Mitigate the Risk of Natural Resource Conflicts?   [SSRN link]

The resource curse as manifested by an increased likelihood of conflict over rents can be mitigated by institutions. Lei and Michaels (2014) find that exogenous discoveries of “giant” oil fields increase the likelihood of violent conflict, but they find no evidence that democratic institutions mitigate this risk. We estimate the degree to which institutions mitigate the resource curse by reducing the risk of natural resource conflicts by interacting oil discoveries with measures of economic and political institutions. For conflicts in general we find no evidence that democratic institutions mitigate the risk of natural resource conflicts. However, we find that high quality economic institutions reduce the likelihood of territorial (separatist) conflicts following a natural resource rent windfall. Highly autocratic and highly democratic institutions also reduce the likelihood of territorial conflict after a natural resource rent windfall. ​

Keywords: Conflict, Civil War, Separatist Conflict, Oil, Resource Curse, Institutions, Rent Seeking, Conflict Resolution
JEL Codes: Q34, O13, P48, D74

Link to: Exogenous Resource Shocks and Economic Freedom

There is an extensive literature on the presence of valuable natural resources creating a competition for control of central states and resource rents. This mechanism has been argued to be an important underlying factor preventing certain countries from acquiring good institutions and achieving long run economic growth. In this paper, we use a recent data set on the discovery of large, exogenous oil field discoveries as a means of testing whether the presence of large resource rents maligns the freedom of a country’s economic institutions. We find there to be some evidence of contemporaneous effects of these discoveries on the size of government spending, especially transfer payments and subsidies, but this does not show up in our overall measure of economic institutions. These effects also dissipate with time to statistical and economic insignificance, suggesting the discoveries have short run effects on policy but do not impact the underlying institutions at all. At least for this set of exogenous resource discoveries, there is no resource curse for economic institutions.

Keywords: Resource Curse, Economic Freedom, Economic Institutions
JEL Codes: D72, O13, P10

Link to: ​Civil War and and Economic Growth: The Case for a Closer Look at Forms of Mobilization

This paper explores the idea that the lack of robust evidence on the growth impact of civil war could partially be a consequence of considering civil war as an unified conceptual category, regardless of the ordinate of group identity invoked in mobilizing for war. To do so, we distinguish explicitly between episodes of internal conflict where contestants mobilized along the lines of ethnicity and ones where mobilization occurred along other markers of group identity. Using alternative definitions of civil war and using both Fixed Effects and System-GMM estimators to address the endogeneity of conflict and per capita income, we obtain a robust negative impact of nonethnic civil war on economic growth over the period 1975-2005. By contrast, the impact of ethnic war, while negative, is statistically insignificant in all but two specifications.

Keywords : Growth, civil war, ethnicity, mobilization, system GMM
JEL Codes: O43, D74

Link to: Firm Investment Decisions in the Post-Conflict Context

Economic and political transition can occur through peaceful or violent means. Violent transition disrupts the incentive for firms to make productive investments. This paper studies the determinants of profit reinvestment for firms in post-conflict transition economies. Results indicate that while access to finance is an important determinant of reinvestment during transition, it is not as important in the post-conflict context. However, property rights protections, in particular institutions of contract enforcement, are a more important determinant of profit reinvestment for firms operating in the post-conflict environment than for firms in general. This indicates that obstacles to investment are context specific.

Keywords: Post-Civil War Recovery, Civil Conflict, Reinvestment, Property Rights, Judicial Institutions
JEL Classification: P14, P26, P37, O16

Link to: Institutions and Investment in Post-Civil War Recovery  [SSRN link]

Theories of post-civil war recovery predict a “peace dividend” via the re-accumulation of capital per worker. I hypothesize that such a recovery will occur only when quality institutions have been established. To test this hypothesis I couple data on civil wars from 1970 to 2000 with the measure of legal structure and protection of private property from the Economic Freedom of the World Index. Results from growth regressions using an interaction between an index of property rights and legal institutions, and investment as a percentage of GDP confirm that weak and uncertain institutions inhibit investment, particularly private investment from being allocated efficiently to contribute to recovery in the post-conflict environment. This paper provides empirical support for a model of conflict recovery via capital accumulation, conditional on legal structure and the protection of property rights.

Keywords: Civil War, post-war recovery, institutions, investment, peace dividend, El Salvador
JEL Classification: 011, 017, 043, 050

Other Publications

Link to: Integrating the Economic Way of Thinking into US History Courses  Can the economic way of thinking be integrated into high school and middle school US history courses? We introduce an instrument, the Test of Economic Thinking, to assess student’s ability to apply the economic way of thinking. In a pilot study involving 120 high school and middle school students across three states, we implement the Test of Economic Thinking to assess the effectiveness of integrating economic concepts into US history courses using the supplemental Economic Episodes in American History textbook. The results indicate that the supplemental textbook improves student’s ability to apply economic concepts. The pilot study suggests that integrating the economic way of thinking into high school US history can be fruitful and that the Economic Episodes in American History text can be a useful tool to facilitate the integration.

Works in Progress

Violent conflict often weakens formal institutions leaving weak states unable to provide effective governance. Weak formal governments lack the capacity to protect property, administer justice, or administer foreign aid efficiently. This leaves societies susceptible to a vicious cycle of underdevelopment and violent internal conflict. Analyzing post-conflict development and institutions through the lens of “humanomics” focuses our attention on informal norms and customary governance. Given the acute constraints facing formal governance, informal or customary governance is more likely to succeed. This study reviews the evidence on the success of governance rooted in customary institutions in post-conflict Afghanistan and Rwanda. Based on economic theory and the analysis of these cases, I argue that the most viable path to post-conflict recovery involves customary or informal governance.

Keywords: Violent Conflict, Internal Conflict, Humanomics, Informal Governance, Customary Governance.

Institutions that protect private property are a fundamental determinant of economic growth, in part by increasing the productivity of physical and human capital. However, institutions do not afford uniform protection of property to all. We assess the relationship between women’s property rights and economic growth in a large panel of countries. Controlling for the quality of property rights protections for men, better protection of women’s property rights is associated with faster economic growth. In addition, we present evidence that women’s property rights may affect economic growth by making human capital more productive.

Keywords: Economic Growth, Property Rights, Institutions, Gender, Economic Development
JEL Codes: O43, O47, P48, J16

Property rights are part of the institutional bundle associated with economic growth and development. Institutional protections of property help to align the incentives of individuals to allocate resources efficiently and to make productive investments. Often women do not receive the same institutional protections as men, excluding women from opportunities to make productive investment for themselves and society. Most cross-country growth regressions do not distinguish between institutional protections for men and women. We test if institutional protections of women’s property rights are associated with economic growth in a large panel of countries. Women’s property rights are significantly associated with economic growth even controlling for the effect of men’s property rights. The association between economic growth and institutional protections of private property for women is larger and more robust than the same association for men. The results imply that institutional improvements on the extensive margin can have a particularly large effect on economic growth.
 
Keywords: Economic Growth, Property Rights, Institutions, Gender, Economic Development
JEL codes: O43, O47, P48, J16

Competition is widely seen as a driver of improvements in institutional quality. We consider the robustness of competition, namely, polycentricity, in the form of the creation of institutions built by rebel groups in the course of civil war. In a variety of panel regressions and synthetic control specifications, we find minor evidence suggesting small beneficial effects of rebel institutions on state institutional quality, though it is not robust. Given that most conceptions of competition within economics involve incumbents hostile to new entrants, we view our findings as relevant for any complete statement on the effects of polycentricity.  

Keywords: Polycentricity; Civil War; Rebel Institutions; Institutional Development
JEL Codes: D74; D72; H1

AbstractThis paper revisits Sobel and Coyne (2011), which finds a cointegrating relationship between democracy and economic freedom. We extend their sample with data published since that time, make use of the second generation of panel unit root and panel cointegration tests, and apply the more comprehensive measure of democracy from Varieties of Democracy. With these methodological improvements in place, we do not find that either economic freedom or democracy has a unit root in the full set of countries studied, and they therefore cannot have a cointegrating relationship. We then apply the methodology developed by Chortareas and Kapetanios (2009) in order to isolate a subset of countries whose institutions may in fact have a cointegrating relationship.

Keywords: Economic Freedom; Democracy; Cointegration
JEL Classification: O43; D72; P17; C33