On the Relative Contributions of National and Regional Institutions to Economic Development

ABSTRACT Institutional quality is recognized as a fundamental driver of long‐run growth (Acemoglu et al. 2005) and it has been widely studied at both country and regional levels in the economic growth literature. Nevertheless, the literature is scant on the question of how this relationship behaves when the hierarchical structure of regions and countries is considered. To fill this gap, we propose a novel approach to the question, relying on multilevel econometric techniques. We empirically analyze how much of the effect shown by institutional quality on regional economic development can be attributed to the quality of national institutions. We argue that ignoring the multilevel structure may lead to over‐weighting the real influence of regional institutional quality and, conversely, under‐weighting (or directly overlooking) the effect of the country's institutional quality on regional economic development. We present empirical evidence that the national institutional level outweighs the possible effect of lower government tiers have on a region's economic development.