IT'S A SMALL WORLD AFTER ALL: INTERNET ACCESS AND INSTITUTIONAL QUALITY

Using a panel of up to 114 countries covering the years 1990 through 2010, we estimate the effect of Internet use on changes in countries' Economic Freedom of the World (EFW) scores. The point estimates suggest that the marginal effect is generally positive. However, starting from above‐average EFW scores (>7.7 out of 10; examples in 2010 include the UK, Switzerland, and Hong Kong) the marginal effect turns negative. Taking this interaction into account, the marginal effect is positive and statistically significant for countries starting at initial EFW scores of around 6 or less. Examples of countries with 2010 EFW scores near this threshold include China, Nigeria, and Pakistan. We discuss mechanisms that potentially generate this conditional relationship between Internet use and institutional change. (JEL O10, O43, P48)