Institutions and well-being: A dynamic common correlated estimation analysis across HDI levels

Abstract

Institutional quality plays an important role in the well-being of the people. This study explores the relationship between institutional quality and well-being. It will focus on the key institutional aspects, such as rules and regulations, government effectiveness, and corruption. The study will examine how these institutional aspects affect people's well-being. A panel of 50 nations was selected. The time period of the study is 1996 to 2024. The nations were divided into two groups: very high and high human development index (HDI) nations. This categorization was based on their respective HDI scores. The dynamic common correlated effect (DCCE) technique was used to capture the issues of cross sectional dependence and slope heterogeneity. The empirical results reveal that institutions and well-being are positively and significantly related in very high HDI nations. However, there exists a negative relationship in the case of high HDI nations. Per capita income and well-being are positively related in both groups, whereas trade openness is positive and significant in case of group one and insignificant in group two. The empirical results identify two key findings: first, institutions are vital for prosperity, and second, the quality of institutions also matters, as in nations where institutions are stronger and operate with sovereignty, the standard of living is higher. This research paper is an important contribution to the literature. It uncovers the role of vital institutional aspects and their relationship with the well-being of the people, with such a large panel dataset.