Institutions and economic volatility: Democracy versus risk of expropriation

Abstract

Purpose: The purpose of this paper is to decompose the effects of democracy and risk of expropriation on economic volatility. Design/methodology/approach: The authors follow Acemouglu et al. and use settler mortality in former colonies in the seventeenth, eighteenth and nineteenth centuries as an instrument of 'risk of expropriation,' in addition to a democracy index to capture institutional effects on economic stability. Findings: The authors present empirical evidence that the economic performance of more centralized former European colonies is not more volatile than that of democratic ones, once the exogenous variation of expropriation risk across countries is included in the model Originality/value: The paper investigates the role of a spectrum of different institutions on economic stability. In this sense, the paper contributes to the literature analyzing the effect of property-rights protection, as measured by a risk-of-expropriation index, on the relation between democracy and economic stability. © Emerald Group Publishing Limited.