(labeled model set 1), corroborates our results; the most potent predictor of the incidence of episodes is initial unemployment. This is evidenced by its extremely high posterior inclusion probability (PIP) (99.9).<sup>13</sup> The next best predictor, albeit with a substantially lower posterior inclusion probability (35.3), is the Economic Freedom Index. The other explanatory variables considered do not appear to be useful predictors.<sup>14</sup> Second, to assess which aspects of policy matter most we replicate this analysis, but now replace the Economic Freedom Index by its component indicators, notably indices of the regulation of business, credit and labor, the freedom to trade internationally, the size of the government, legal system and the security of property rights, and access to sound money. The results, which are presented in the second column (labeled model set 2), suggest that the legal system and property rights and rules governing credit, business and labor, are the most important aspects of the business environment. Note that while the posterior inclusion probability of the indicator of the legal system is higher than that of regulation, the coefficient associated with regulation is much higher.

Third, to validate these results, and to further probe which aspects of regulation matter most, we run a Bayesian Model Averaging analysis where we use as explanatory variables initial unemployment and a host of alternative indicators of regulation. To proxy labor regulation we use indicators of the severance pay and advance notice requirements as well as the generosity of unemployment benefits from the IMF (Aleksynska et al., 2011) and the rigidity of employment index from the World Bank Doing Business Indicators. The time it takes to export as recorded in the Doing Business Indicators is used as a proxy for trade regulation, whereas the time it takes to open and close a business and the time it takes to enforce a contract are used as proxies for business regulation. We also include an indicator of financial regulation from Abiad et. al. (2008), as well as indicators of political stability, the control of corruption and the rule of law from the _Worldwide Governance Indicators._ The Bayesian Model Averaging analysis suggests that amongst them the time it takes to enforce a contract and the control of corruption are the most important predictors of the incidence of episodes, albeit at much lower posterior inclusion probabilities than initial unemployment. In particular, protracted contract enforcement is associated with a reduced

> 13 The PIP is a measure of how important a predictor a variable is and is defined as the sum of the posterior probabilities of all models that include the variable in question; if models that include this variable are more likely, one can infer that the variable in question has predictive power.

> 14 In robustness checks not presented to conserve space but available upon request we also experimented with including additional explanatory variables, notably, literacy, mortality, demographic indicators, the exchange rate and domestic credit as a share of GDP, but none of these had substantial explanatory power.

16