Essays on the quality of institutions and economic performance

This thesis builds a model to describe the process of institutional change in which the probability of revolution depends on the state of the economy and the level of education in the society. The model generates two cases. First, when the cost of revolution is lower than the cost of the recession,institutional change will occur. The magnitude of the negative shock,sufficient to cause a revolution, depends on education; the higher the level of education in the society the lower the magnitude of the negative shock. The second case, when the cost of a revolution is higher than the cost of a negative shock, generates a mechanism of marginal institutional changes. Those who hold the power can adjust the quality of institutions to avoid a revolution; the magnitude of the changes necessary to prevent a revolution depends positively on both the magnitude of the shock and the level of education in the society. Both cases predict that institutional improvement is associated with increasing levels of education. We then test the prediction of our model. First, in a dynamic panel analysis of 86 developing countries, the system GMM results demonstrate that the quality of institutions will increase by 10% if years of schooling increase by one standard deviation. This result is confirmed by two separate bias correction estimations (BCFE and LSDV). Second, we use an EU crossregional dataset of the Quality of Government to examine the determinants of institutional quality in European regions. Using the share of atheists in every region as an instrument for education, our IV estimations confirm the prediction of our model. More education leads to better institutions. Additionally, our findings confirm other existing theories of the political and social determinants of the quality of institutions and demonstrate that this phenomenon is not confined to developing countries or even post-communist economies