A new cross-country index measuring the heterogenous effects of informal institutions

Abstract

ABSTRACT Studies have identified two fundamentally different types of informal institutions: public and private informal institutions. Empirically, most studies have focused on public informal institutions such as social trust, since indexes measuring private informal institutions such as closed trust have been rare. This research introduces a new index of private informal institutions that captures whether private informal institutions hinder or enhance development by complementing, accommodating, competing, or substituting formal institutions. To this end, we introduce an empirical strategy to measure the four types of private informal institutions for more than 120 countries for the years 1990–2010 in a five-year interval. The extracted index reveals that advanced industrial democracies have complementing and accommodating private informal institutions, whereas post-communist and resource-rich countries have substituting private informal institutions, and countries with some experience of democratization and development display competing private informal institutions. The index also shows that private informal institutions can change rapidly, which can expedite and enhance institutional quality for some countries but deteriorate it for others.