Working Paper: NBER ID: w24546
Authors: Ashantha Ranasinghe; Diego Restuccia
Abstract: Using cross-country micro establishment-level data we document that crime and lack of access to finance are two major obstacles to business operation in poor and developing countries. Using an otherwise standard model of production heterogeneity that integrates institutional differences in the degree of financial development and the rule of law, we quantify the effects of these institutions on aggregate outcomes and economic development. The model accounts for the patterns across establishments in access to finance and crime as obstacles to their operation. Weaker financial development and rule of law have substantial negative effects on aggregate output, reducing output per capita by 50 percent. Weak rule-of-law institutions substantially amplify the negative impact of financial frictions. While financial markets are crucial for development, an essential precondition to reap the gains from financial liberalization is that property rights are secure.
Keywords: financial frictions; rule of law; economic development; crime; access to finance
JEL Codes: O10; O11; O40; O43; O50
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| weaker financial development (F65) | aggregate output (E10) |
| weaker rule of law (P37) | aggregate output (E10) |
| crime (K42) | output losses (D57) |
| financial frictions (G19) | output losses (D57) |
| crime + financial frictions (K42) | output losses (D57) |
| weak rule of law exacerbates financial frictions (G18) | output losses (D57) |
| improving rule of law (K40) | better economic outcomes (P17) |
| enhancing financial markets (G19) | better economic outcomes (P17) |
| differences in rule of law (K15) | potential for crime at establishment level (K42) |
| differences in financial market development (G19) | access to credit (G21) |