Institutions or human capital: which is more important for economic performance? Evidence from Brazil

We investigate the role of institutions and human capital on economic performance of Brazilian municipalities. We use instrumental variables with two-stage least squares estimators for capturing causal relationships. We found evidence that institutional quality has an important and robust effect on the income of municipalities. However, there is no robust evidence for the role of human capital. These results are similar to what Acemoglu, Galleano and Robinson (2014) documented in their research conducted with cross-country data. Human capital is likely to be a consequence of institutions.