Institutional Quality as a Conditioning Factor of Convergence: Evidence from European Economies

This paper examines the role of institutional quality in shaping income convergence across European economies over the period 2004–2023. While previous studies frequently assume either linear institutional effects or strong regime-dependent threshold dynamics, this study evaluates whether institutional conditions fundamentally alter the speed of convergence. Using a fixed-effects panel framework with a spline-based specification and an endogenously determined institutional breakpoint, this analysis allows the convergence coefficient to vary across institutional regimes. The results confirm the presence of conditional convergence in the full sample and across regional subgroups. Although an estimated institutional breakpoint marginally improves model fit, formal Wald and bootstrap-based threshold tests do not provide strong evidence of a structural break in the convergence parameter. The speed of convergence remains broadly stable across institutional regimes, suggesting that institutional quality does not function as a binary activation threshold. Instead, institutions appear to operate as conditioning factors influencing the stability and robustness of convergence dynamics rather than triggering discrete regime shifts. Regional estimations reveal heterogeneity in institutional dispersion and growth volatility, particularly in the Western Balkans, yet without fundamental alterations in convergence mechanisms. The findings contribute to the literature by reframing the institutional–convergence nexus toward a moderated nonlinear interpretation, emphasizing structural conditioning rather than regime-dependent convergence.