Baryshnikova, Nadezhda V. , and Maria Monica Wihardja (2012). "The E¤ect of Inequality, Democracy, and Economic Development on Institutions: A Dynamic Panel Study" Paper presented at the 9th annual conference of the HDCA, 5-7 September 2012, Jakarta, Indonesia.

We study how inequality, democracy and economic development a¤ect government stability, investment pro?le, level of corruption, and bureaucratic quality using a dynamic panel data set across 76 countries from 1984 to 2006. We hypothesize that institutions are not exogenous and the above mentioned factors help to shape institutions. Using the Arellano-Bond (1991) 2-step GMM estimator with a heteroskedasticity-consistent error correction byWindmeijer (2005) to control for endogeneity biases, we ?nd that inequality, democracy and economic development a¤ect government stability but these e¤ects depend on one another. In other words, each of these variables also has second- and third-order e¤ect through the e¤ects of other variables. These results are robust through di¤erent number of instruments and have passed the Hansen test of joint validity of instruments and the Arellano-Bond test for AR(2) in di¤erences. We do not ?nd any evidence of the e¤ect of these variables on any other institutional variables. Our result suggests that there is no straight forward answer on the e¤ect of inequality, democracy and economic development on institutional quality because these e¤ects are all intertwined with each other. Their relation with economic performance is a two-way relation although this relation is much more complex that we thought before.