Legal Institutions and Financial Development
A burgeoning literature finds that financial development exerts a first-order impact on long-run economic growth, which raises critical questions, such as why do some countries have well-developed growth-enhancing financial systems while others do...
| Main Authors: | , |
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| Format: | Policy Research Working Paper |
| Language: | English en_US |
| Published: |
World Bank, Washington, DC
2014
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| Subjects: | |
| Online Access: | http://documents.worldbank.org/curated/en/2003/09/2534364/legal-institutions-financial-development http://hdl.handle.net/10986/18057 |
| Summary: | A burgeoning literature finds that
financial development exerts a first-order impact on
long-run economic growth, which raises critical questions,
such as why do some countries have well-developed
growth-enhancing financial systems while others do not? The
law and finance theory focuses on the role of legal
institutions in explaining international differences in
financial development. First, the law and finance theory
holds that in countries where legal systems enforce private
property rights, support private contractual arrangements,
and protect the legal rights of investors, savers are more
willing to finance firms and financial markets flourish.
Second, the different legal traditions that emerged in
Europe over previous centuries and were spread
internationally through conquest, colonization, and
imitation help explain cross-country differences in investor
protection, the contracting environment, and financial
development today. But there are countervailing theories and
evidence that challenge both parts of the law and finance
theory. Many argue that there is more variation within than
across legal origin families. Others question the central
role of legal tradition and point to politics, religious
orientation, or geography as the dominating factor driving
financial development. Finally, some researchers question
the central role of legal institutions and argue that other
factors, such as a competitive products market, social
capital, and informal rules are also important for financial
development. Beck and Levine describe the law and finance
theory, along with skeptical and competing views, and review
empirical evidence on both parts of the law and finance view. |
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