The Impact of Formal and Informal Institutionson Economic Growth: A Panel Data Analysis

Abstract

Purpose | The purpose of the article is to assess the impact of institutions on economic performance using the example of a broad set of economies over the period 1990–2020. Research method | The article uses both critical literature review and empirical analysis. The empirical analysis uses quantitative methods, more specifically panel data modeling. Results | The obtained research results do not differ from previous findings. Specifically, a higher-quality institutional system leads to a higher rate of economic growth. The study found that the impact of changes in formal institutions will vary depending on the quality of informal institutions. When informal institutions are of higher quality, improving formal institutions will lead to better outcomes than when informal institutions are of lower quality. Therefore, it can be concluded that formal and informal institutions can mutually reinforce each other, leading to higher rates of economic growth. On the other hand, formal and informal institutions may be incompatible, leading to lower rates of economic growth. Originality / value / implications / recommendations | The issue of the impact of institutions on economic growth has been discussed in the literature for some time. However, attempts to empirically verify the impact of the interactions between formal and informal institutions on the rate of economic growth have rarely been undertaken. A strength of this article regards its consideration of this interaction and its estimation of its impact on the rate of economic growth.