Working Paper: NBER ID: w10126
Authors: Thorsten Beck; Ross Levine
Abstract: This paper provides a concise, selective review of research on the role of legal institutions in shaping the operation of financial systems. While a burgeoning literature finds that financial development exerts a first-order impact on economic growth, the law and finance literature seeks to understand the role of legal institutions in explaining international differences in financial systems. Considerable research dissects, critiques, and debates the influence of investor protection laws, the efficiency of contract enforcement, and private property rights protection on the effectiveness of corporate governance, the efficient allocation of capital, and the overall level of financial development. Furthermore, legal scholars, political scientists, historians, and economists are questioning and assessing the importance of historically determined differences in legal traditions in shaping national approaches to investor protection laws, contract enforcement, and property rights. The field of law and finance promises to be a contentious and important area of inquiry in coming years.
Keywords: legal institutions; financial development; investor protection; contract enforcement
JEL Codes: K40; K22; G18; P14
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| legal institutions (D02) | financial development (O16) |
| legal institutions (D02) | investor protection laws (G18) |
| investor protection laws (G18) | efficiency of capital allocation (D61) |
| efficiency of capital allocation (D61) | financial development (O16) |
| legal origin (K20) | financial development (O16) |
| adaptability of legal systems (K40) | financial development (O16) |
| common law traditions (K15) | financial outcomes (G39) |