Measuring Informal Institutions with Google Trends

University essay from Lunds universitet/Nationalekonomiska institutionen

Abstract: Informal institutions are believed to be especially determinant in institutional change, as argued by both old and new institutional economic theory. However, due to the complexity of quantifying them, they are rarely measured. In this study, I examine how well one can capture informal institutions by using Google Trends. I create an index over informal institutional quality (IIQ), proxied by 66 Google Trend topics with worldwide coverage. The topics are linked to eight proposed institutions determinant for change. In addition to well-researched informal institutions such as equality, individualism, trust, hierarchy, and unionization, I propose financial literacy and homogeneous preferences as core informal institutions. I find that there is a highly significant correlation between IIQ and GDP. I also find a strongly significant association between IIQ and R&D expenditure. Homogeneous preferences show to warrant faster GDP growth. Out of the measured institutions, financial literacy shows to have the strongest association with GDP, entrepreneurship and R&D expenditure. There is an association between IIQ and government size and a negative correlation between IIQ and the Gini coefficient. IIQ also correlates negatively with poverty headcount. Overall, the IIQ returns similar results against the dependent variables as established measures over formal institutional quality. This supports my claim that informal institutions can be captured using Google Trends.

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