Institutions and Growth Volatility

Authors


  • We thank Rob Franzese, Avner Greif, Geert Hofstede, Cem Karayalcin, Dani Rodrik, Shalom Schwartz, Mehmet Ali Ulubasoglu and an anonymous referee for their many helpful comments and suggestions.

Nejat Anbarci, School of Accounting, Economics, and Finance, Deakin University, 221 Burwood Highway, Burwood, VIC 3125, Australia. Email: nejat.anbarci@deakin.edu.au

Abstract

Recently some studies provided evidence that democratic political institutions generate less volatile growth. These studies, however, do not provide any link between democracy and investment volatility. Here, we focus on the specific channel that links individualistic societies and low growth volatility. We test whether investment volatility and consequently growth volatility are lower in individualistic societies. We construct a two-equation system of investment and income growth volatility, allowing various measures of individualism to influence growth volatility both directly and indirectly. We find that individualism significantly directly and indirectly influences growth volatility negatively.

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