Institutions and savings in developing and emerging economies

Domestic savings are an important prerequisite for capital formation and growth. In this paper we analyze a new channel through which institutions influence aggregate savings and economic development. Whereas research in the field of savings decisions concentrates largely on the level of the individual, the literature on institutions and growth as well as on aggregate savings formation focuses on the aggregate, national level. First, we develop a framework that brings together both lines of reasoning, arguing that institutions may influence the individual savings decision as well as national savings in aggregate. This potential for institutional quality to influence economic performance has been neglected so far. Second, we build upon the empirical literature on aggregate savings formation and provide results supporting our hypothesis that better economic institutions drive aggregate savings formation upwards. By contrast, we do not find such effects in the case of the political environment. Our findings are robust when checked against a number of changes in explanatory variables, estimation methods and the treatment of instruments.