Working Paper

Institutional Quality Database

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In this paper we emphasize the role of institutions in economic analysis. We describe and
compare different institutional classifications systems, which is rarely done in the literature,
and show how to operationalize institutional classification based on the subject category, as the
most appropriate one. More than thirty established institutional indicators can be clustered into
three homogenous groups of formal institutions: legal, political and economic, which capture
to a large extent the complete formal institutional environment of a country. We compute the
latent quality of legal, political and economic institutions with factor analysis for every country
in the world and for every year, relative to the values of others. We propose a World Institutional
Quality Ranking, through which we can follow whether a country is improving or worsening its
relative institutional environment. The calculated latent institutional qualities can be especially
useful in further panel data applications, and add to the usual practice of using simply one or
another index of institutional quality to capture the institutional environment, so we make the
Institutional Quality Database freely available online.


Aljaz Kuncic


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