Working Paper: NBER ID: w9089
Authors: Thorsten Beck; Asli Demirgüç-Kunt; Ross Levine
Abstract: This paper assesses two theories regarding the historical determinants of international differences in financial development. The law and finance theory holds that legal traditions differ in terms of the priority they attach to protecting the rights of private investors vis-a-vis the State and this has important implications for financial development. The endowment theory argues that the disease and geographical environment influence the formation of long-lasting institutions that influence financial development. Using a sample of former colonies, we explore whether the legal system brought by colonizers and/or the initial disease/geographical endowments encountered by colonizers explain financial development today. The empirical results indicate that both the legal systems brought by colonizers and the initial endowments in the colonies are important determinants of stock market development and private property rights protection. However, initial endowments are more robustly associated with financial intermediary development than legal origin and initial endowments explain more of the cross-country variation in financial intermediary and stock market development than legal origin.
Keywords: No keywords provided
JEL Codes: G2; K2; O11; P51
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Legal tradition (British) (K15) | Protection of private property rights (P14) |
| Legal tradition (British) (K15) | Financial development (O16) |
| Legal tradition (French) (K15) | Protection of private property rights (P14) |
| Legal tradition (French) (K15) | Financial development (O16) |
| Initial geographical and disease environments (I12) | Institutions established by colonizers (F54) |
| Institutions established by colonizers (F54) | Financial development (O16) |
| Initial geographical and disease environments (I12) | Protection of private property rights (P14) |
| Initial geographical and disease environments (I12) | Financial development (O16) |