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To isolate the effect of religiosity on economic growth, the authors have dealt with the possibility of reverse effects from development to religion. They base this on the ‘Secularization Hypothesis’ (Weber, 1930), which says that economic development causes individuals to become less religious, as measured by church attendance and religious beliefs. The beliefs may refer to heaven, hell, an afterlife, God and so on. A second theory talks about demand and supply of religions, focusing on competition among religion providers. A greater diversity of religions available in a country or region is thought to promote greater competition, hence a higher quality of religion product and one that is tailored better to Individual preferences. Thus more religious diversity stimulates greater religious participation and beliefs. This was propounded by Adam Smith as early as in 1791, which compared to today was much less diverse. So in today’s context religious diversity is an important factor. The extent of religious diversity the extent of religious diversity and competition are thought to depend on how the government regulates the market for religion. For example, the existence of an established state church is viewed as one source of a low degree of religious pluralism and, therefore, of low participation in organized religion. Greater state regulation of religion, measured by, among other things, whether the government appoints or approves church leaders is argued to decrease the efficiency of religion providers and, therefore, to generate lower rates of church attendance. The authors’ approach to the determinants of religiosity assumes that demand and supply forces combine to influence levels of religious participation and beliefs. They try to pin down the direction of causation from religion to economic performance, rather than the opposite. The instrumental variables used are (i) Dummy for the existence of a state religion, and (ii) Dummy for existence of a regulated market structure in which govt. approves or appoints religious leaders. An instrument for religious adherence is also used.
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