On the relative contributions of national and regional institutions to economic development

Institutions have been proved as a fundamental driver of long-run growth (Acemoglu et al., 2005) and, therefore, their functioning, i.e., their quality of governance, is a well-known theoretical fact in the literature on economic growth, which has been widely studied at both country and regional levels. Nevertheless, there is a lack of literature on how this relationship behaves when considering the hierarchical structure that regions and countries present. To solve this problem, we propose a novel approximation to the question, relying on multilevel econometric techniques, highly applied in other fields such as education or psychology, but much less employed in economics. We empirically analyze how much of the effect shown by the quality of government on the economic development of a given region can be attributed to the quality of government of its belonging cluster i.e the country. We argue that ignoring the multilevel logic may lead to overweighting the real influence of regional governance quality and, conversely, under-weighting (or directly overlooking) the effect of the country’s governance quality on the economic development of a given region. We show empirically that the aggregate framework (and its quality) given by the national level of institutions outweighs the effect that lower government ties may present on the economic development of a region.