Recent studies have shown that institutions are a key determinant of economic development. However, there is no consensus on how different types of institutions are interrelated and which way they affect economic performance. The hierarchy of institutions hypothesis is that political institutions provide a foundation for economic institutions, which in turn have a direct impact on economic performance.

This paper uses panel data from European transition countries over the period 1991–2018 to test this hypothesis. The fixed effects and two-stage least squares estimates indicate that economic and government institutions have impacted economic performance. Additional findings include that there is no significant evidence of the effect of institutions on growth in the former Soviet Union countries, which are a subset of the sample used in the study.