<u>Governance. The main measure of institutional quality is a standardized index that summarizes 6 other</u> (also standardized) indices from the Worldwide Governance Indicators, produced by the World Bank (see Kaufmann, Kraay and Mastruzzi, 2010 for methodological details). The indices, namely Control of Corruption, Government Effectiveness, Political Stability and Absence of Violence/Terrorism, Rule of Law, Regulatory Quality and Voice and Accountability, aim to capture different dimensions of institutions. To construct the governance index, we standardize the sum of the 6 standardized indices above. The data are available for 174 countries from 1996 to 2016.

The indices are built based on surveys conducted with a number of respondents worldwide, as well as expert assessments. Following the original definitions in Kaufmann, Kraay and Mastruzzi (2010), Control of Corruption reflects perceptions of the “extent to which public power is exercised for private gain, including both petty and grand forms of corruption, as well as “capture” of the state by elites and private interests.” Government Effectiveness measures the “perception of quality of public services, the quality of the civil service and the degree of its independence from political pressures, the quality of policy formulation and implementation, and the credibility of the government's commitment to such policies”. Political Stability and Absence of Violence/Terrorism summarizes the perceived “likelihood of political instability and/or politically-motivated violence, including terrorism”. Rule of Law reflects “the extent to which agents have confidence in and abide by the rules of society, and in particular the quality of contract enforcement, property rights, the police, and the courts, as well as the likelihood of crime and violence”. Regulatory Quality captures the “ability of the government to formulate and implement sound policies and regulations that permit and promote private sector development”. And lastly, Voice and Accountability summarizes the “extent to which a country's citizens are able to participate in selecting their government, as well as freedom of expression, freedom of association, and a free media”. Countries that score high in those indices are perceived to perform better in each of those dimensions of institutional quality.

<u>Financial markets. We use 3 measures of financial market development. First, we gathered data on the</u> total domestic credit to the private sector as a percentage of GDP, collected by the World Bank. The data span 182 countries again for the period of 1996 to 2016. As seen in Table 1, the average in our sample is 49% (median = 35%) and there is considerable variation across time and countries. Highermiddle and high income countries have an average of credit to the private sector as percentage of GDP almost 3 times higher than low and lower-middle income countries (67% and 23%, respectively, as seen in OA Table 1). Similarly to insurance penetration, a few countries have a very high share of domestic credit to GDP.

The other two measures of financial market development are more limited in terms of time and geographical coverage. The second set of data reflects the level of a country’s financial liberalization. The data were put together by Abiad, Detragiache and Tressel (2010) and capture seven dimensions of financial market development: credit controls and reserve requirements, interest rate controls, entry barriers, state ownership, policies on securities markets, banking regulations and restriction on the financial account. In our analysis we use the standardized index (Financial Reform Index) also produced by the authors that summarizes all the seven dimensions. Higher values of the index correspond to higher levels of financial liberalization. Finally, we have data from the Global Findex database, produced by the World Bank (Demirgüç-Kunt et al. 2018), on the share of the adult population that has an account in a formal financial institution. The data come from the 2011 and 2014 rounds of the Findex report and cover 150 countries. In the average country in our sample, around half (51%) of the population holds an account (median = 46%). We use this variable as a proxy for access to the formal 8