Quality Of Government Institutions Research Articles

Governance and Stock Market Performance

This study uses international asset pricing models to investigate the link between the quality of government institutions and the performance of global stock markets. The results demonstrate a significant positive association between stock market performance measures and the quality of the institutional environment. Performance measures examined for the cross-section of countries were the average monthly stock index excess returns and the Sharpe ratio. All measures of performance were adjusted for global and local risk factors known to explain their international variation. The quality of governance is also found to be negatively associated with stock market total risk and idiosyncratic risk, consistent with the notion that stable institutions are linked to reduced variations in equity returns. These findings suggest countries with better-developed governance systems have stock markets with higher returns on equity and lower levels of risk. The results lend support for the view that a precondition for financial market development is the improvement of the institutions which govern the process of exchange.

The economics of the informal sector: a simple model and some empirical evidence from Latin America

This paper presents the view that the informal economy arises when excessive taxes and regulations are imposed by governments that lack the capability to enforce compliance.The determinants and effects of the informal sector are studied in an endogenous growth model whose production technology depends essentially on congestable public services. The model concludes that changes, both in policy parameters and the quality of government institutions, that promote an increase in the relative size of the informal economy will also generate a reduction in the rate of economic growth.The paper then uses data from Latin American countries in the early 1990s to test some of the implications of the model and to provide estimates for the size of the informal sector throughout these countries. The empirical approach consists of identifying the size of the informal sector to a latent variable for which multiple causes and multiple indicators exist. The size of the informal sector is found to depend positively on proxies for tax burden and labor-market restrictions, and negatively on a proxy for the quality of government institutions. Furthermore, the empirical results suggest that an increase in the size of the informal sector negatively affects growth by, first, reducing the availability of public services for everyone in the economy, and, second, increasing the number of activities that use some of the existing public service less efficiently or not at all.