A Structural Model of Institutional Change: Evidence from Transition Economies

It is by now widely appreciated that institution building is at the heart of the transition process. Without functioning institutions markets cannot work effectively and the sustainability of the economic transition process can be undermined. The crisis in Russia provided just one piece of evidence in this regard. While institutions are central to the transition process, institutional reform is not an area that is well understood by researchers and policy makers alike. In this paper we examine the determinants of institutional change using a panel dataset comprising 25 transition economies. One of the defining characteristics of our approach is that we treat institutional change as a multidimensional unobserved variable. Although we observe a number of indicators of institutional change we take explicit account of the fact that each indicator represents a noisy signal. In this respect we utilise a Multiple Indicator, Multiple Cause modelling strategy.