Working Papers in Economics,
University of Gothenburg, Department of Economics

Abstract: The purpose of this paper is to explore the effects of island status and country size on institutional quality, and to determine if these institutional effects can explain the relatively strong economic performance of islands and small countries. One of the main findings of this paper is that the relationship between island status and institutional quality is significantly positive, and that these results are robust to the inclusion of a number of control variables. Further, we find that country size is negatively related to institutional quality, which is in keeping with previous results. Finally, using an instrumental variable method we demonstrate that when Rule of Law is included in regressions on levels of per capita GDP, the positive effects of small country size and island status disappear. These results provide further support for our hypothesis that institutions account for these countries’ relatively better economic performance.

Keywords: islands; political institutions; economic institutions; rule of law; development

JEL-codes: N40; O10

42 pages, June 19, 2007

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