Institutional factors and environmental performance: Insights from global economies

Abstract

This study investigates how institutional quality, democratic governance, political orientation and economic policy uncertainty influence environmental performance across different economies globally. Even if there is literature that highlights the importance of strong institutions and democracy for environmental outcomes, empirical evidence remains inconsistent. Using data from 130 countries between 1996 and 2018, we apply a two-stage approach: first, estimating environmental performance via a stochastic frontier, and then analyzing institutional factors with a FEGLS regression and time lags to address endogeneity. The results reveal that strong institutional quality significantly improves environmental performance (β = 0.032), with its impact amplified in countries with medium and high levels of democracy (interaction terms: β = 0.012 and β = 0.010, respectively). While democracy alone exerts a mixed effect, the presence of robust institutions offsets the negative influence of economic policy uncertainty (β = −0.0273). This study provides new insights into the interplay between institutional quality and governance in fostering environmental sustainability. It also offers policy implications for achieving a balance between economic growth and ecological preservation. • Institutional quality significantly boosts countries' environmental performance. • Democracy's positive environmental impact depends on robust institutional frameworks. • Left-wing orientation aids efficiency only when paired with strong institutions. • Economic policy uncertainty weakens environmental performance across nations.