capital is also significant at the 5 percent level. Interestingly, government effectiveness is _insignificant_ when included in the second stage, while lagged effectiveness is significant and positively signed in the first stage human capital equation. This gives us some limited confidence that the effects of good governance—at least when measured with government effectiveness—operates primarily through its mediating role on human capital.<sup>28</sup> This is also the argument first raised in Glaeser _et al._ (2004), although they arrive at their claim from a different angle.

In column ( _Z9_ ) we use a measure of the pervasiveness of informal payments as an instrument for government effectiveness. There are several reasons why we choose not to use this instrument more extensively. First, the correlation between informal payments and both government effectiveness and human capital is very low.<sup>29</sup> Second, the sample size—even in the attenuated sample, is extremely small. Finally, the instrument is relatively weak.<sup>30</sup> Nonetheless, we note that in this specification, human capital remains marginally significant, and government effectiveness is positive and highly significant.

The fairly large literature on institutions and growth that emerged following the paper by Acemo ̆glu, Johnson & Robinson (2001) has utilized, as instruments for institutions, settler mortality. We are somewhat reluctant to use these instruments, however, for two reasons. First, while a convincing case can be made for how the historical disease environment is a plausibly exogenous instrument for contemporary property rights institutions—or broader definitions of institutions— the linkage is, in our view, weaker when institutions are defined, as we do here, as the efficacy of the current government bureaucracy. Second, recent work has questioned the quality of the settler mortality data (Albouy 2012), and corrections to these data lead to settler mortality becoming a weaker instrument.

In any case, for comparability with the rest of the literature, we follow Acemo ̆glu _et al._ (2001) and Hall & Jones (1999) and include in our instrument set instruments corresponding to the fraction of the population of European descent (we maintain as instruments family and school inputs). This is reported in column ( _Z10_ ). As expected, the quality of the combined instrument set is suspect: The specification does not pass the underidentification test, and the Cragg-Donald _F_ statistic suggests 28Another possibility that would give rise to our result is that contemporaneous government effectiveness is strongly correlated with the other regressors included the second stage. While this is not an issue for the investment share and net depreciation rate—the correlation coefficients are 0.29 and -0.34, respectively—this could be the case for human capital ( _ρ_ = 0 _._ 70). There may be reasons why this result could be spurious, however. It is difficult see how an increase in the current level of human capital accumulation can lead to a simultaneous increase in contemporaneous government effectiveness; after all, improvements in human capital generally take time to diffuse into the workforce, including the public sector.

> 29The correlation coefficients are -0.25 and -0.24, respectively. This is very likely due to the very poor quality of the cross-sectional data. The data are typically not available for the year in question, and are generally cobbled from several different sources, which may use slightly different data collection methodologies; see the data appendix for more details.

> 30 Using an alternative micro-based governance indicator, teacher absenteeism, is even worse; the sample size falls to 10, and the instruments fail both the over and underidentification tests.

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