Institutions of Conflict Management and Economic Growth in the European Union

High‐quality institutions of conflict management can serve to mitigate the negative effects of adverse external shocks and social conflict on long‐run economic growth. But in addition to the benefits (production‐enhancing cooperation), there are also costs (taxes and rent‐seeking) of conflict‐management institutions like corporatism and trust. We examine both positive and negative influences in the context of a simple growth model. Contrary to previous research, we predict a non‐linear relationship between institutions and growth. The empirical evidence from a panel for the years 1961‐1995 shows that neo‐corporatism and trust have each had independent positive effects on long‐run growth in the EU, suggesting that the diminishing product range of institutions has not yet been reached. Under an increasing size of government, however, both institutions lead to a dominating negative rent‐seeking effect. Our thanks for helpful comments go to the editors, an anonymous referee, Karl Aiginger, Mathias Dufour, Frauke Skudelny, Robert Urbatsch, seminar participants at the University of Linz, the Austrian Institute for Economic Research and discussants at the European Public Choice Society Meeting 2000 in Siena. All remaining errors are ours, of course. An extended version of this paper is available from the authors on request (Schneider and Wagner 2001). Further results are discussed in Wagner (2000).