Institutions and Growth Volatility

Growth volatility is a major factor that retards growth. Recent studies that link democracy and volatility can not account for a link between democracy and investment volatility. Here, instead, we focus on a specific channel that links individualistism and low volatility. Unlike an individualistic society, in a collectivistic society agents choose to invest together or choose not to invest together. We construct a two-equation system of investment and income growth volatility. We find individualism significantly directly and indirectly influences volatility negatively. We also find that, unlike individualism, democracy’s influence on investment depends on the measure of democracy and econometric specification used.