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Economic Welfare, International Business and Global Institutional Change

Edited by Ram Mudambi, Pietro Maria Navarra and Giuseppe Sobbrio

The distinguished authors in this volume address the fundamental causes for such heterogeneous international experiences, placing particular emphasis on the role of institutions. They demonstrate how the study of economic development is increasingly linked to the development of institutions, which allow for more complex exchanges to occur in markets and societies. Institutions can be understood as rules or constraints that channel individuals' actions in specific directions, and can be formal or informal depending on their genesis. The book highlights the connection between institutions and economic welfare by examining countries at different stages of development. Although the authors' study material effects, they also look at individual well-being which is more strongly influenced by the non-material products of institutions such as opportunity, freedom and relationships. They move on to highlight the role of institutions in global business, in terms of innovation, entrepreneurship and foreign direct investment. In the concluding chapters they focus on the actual process of transition from one institutional framework to another. Amongst other examples, they examine reforms to international financial institutions and constitutional adjustments in transition countries.
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Chapter 4: Institutions Matter for Procedural Utility: An Econometric Study of the Impact of Political Participation Possibilities

Alois Stutzer and Bruno S. Frey


Alois Stutzer and Bruno S. Frey* 1. INTRODUCTION Comparative institutional analysis judges institutions according to their contribution to human welfare. In economics, human welfare is normally evaluated by looking at individual income or measures such as the gross domestic product. Thus standard analysis only considers the outcome of different mechanisms of decision making. It neglects that people partly judge the process of decision making independent of the outcome. In addition to this alternative conceptual view referring to procedural utility, direct measures of subjective well-being offer new opportunities for empirical research of individual welfare. Here procedural utility reaped from democratic decision making is theoretically discussed and empirically identified. Procedural utility goes beyond the utility gained from the favourable outcome that is generated by democratic institutions. A fundamental characteristic of democracy is the involvement of citizens in political decision making. Citizens have the possibility of participating in politics and thus the public or political sphere becomes responsive to them. This empowerment (see for example World Bank, 2000) is hypothesised to increase citizens’ belief in political influence and, moreover, their subjective well-being. In a cross-regional study for Switzerland, the effects of direct democratic * Address: Institute for Empirical Research in Economics, University of Zurich, Blümlisalpstrasse 10, CH-8006 Zurich, Tel.: 0041–1–634 37 29, Fax: 0041–1–634 49 07, Email:, We thank Matthias Benz and Reto Jegen and the participants of the second Messina Conference for valuable comments. This study has been realised using the data collected by...

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