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Rating agencies, Sovereign debt, Credit risk, Eurozone, Panel data, Debt crisis, G24, H63, F34,

document that the correlation between income per capita and democracy disappears when including time and country fixed effects. While their results are robust for the full sample, we find evidence for significant but heterogeneous effects of income on democracy: negative for former colonies, but positive for non-colonies. Within the sample of colonies we detect heterogeneous effects related to colonial history and early institutions. The zero mean effect estimated by is consistent with effects of opposite signs in the different subsamples. Our findings are robust to the use of alternative data and estimation techniques. (JEL D72, O17, O47) In a widely cited and very influential article, Acemoglu et al. (2008) revisit the relationship between income per capita and democracy. Previous investigations had found a strong positive statistical association between income and democracy across countries. This was typically interpreted as evidence in favor of Lipset's (1959) "Modernization Hypothesis." Acemoglu et al. (2008) estimate the linear relationship between income and democracy by exploiting within-country variation over time and find that the positive association between income and democracy disappears in data for the postwar period, 1960 to 2000, once country and time fixed effects are explicitly accounted for. Their rather precise point estimate of zero is robust to extensive robustness checks.The main hypothesis underlying the analysis by Acemoglu et al. (2008, p. 812) is that cross-sectional correlations might conceal important systematic differences across countries that affect both income and democracy since countries may "embark on divergent political-economic development paths, some leading to relative prosperity and democracy, others to relative poverty and dictatorship." The inclusion of country fixed effects accounts for the omitted variable bias due to the existence of countryspecific time invariant factors that jointly affect income and democracy. As an example of such a factor, emphasize the institutions that emerge at critical junctures in the history of a country, for example during colonization. In particular,

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