Working Paper: NBER ID: w9379
Authors: Thorsten Beck; Asli Demirgüç-Kunt; Ross Levine
Abstract: New research suggests that cross-country differences in legal origin help explain differences in financial development. This paper empirically assesses two theories of why legal origin influences financial development. First, the political' channel stresses that (i) legal traditions differ in the priority they give to the rights of individual investors vis-…-vis the state and (ii) this has repercussions for the development of property rights and financial markets. Second, the adaptability' channel holds that (i) legal traditions differ in their ability to adjust to changing commercial circumstances and (ii) legal systems that adapt quickly to minimize the gap between the contracting needs of the economy and the legal system's capabilities will foster financial development more effectively than would more rigid legal traditions. We use historical comparisons and cross-country regressions to assess the validity of these two channels. We find that legal origin matters for financial development because legal traditions differ in their ability to adapt efficiently to evolving economic conditions.
Keywords: Legal Origin; Financial Development; Political Channel; Adaptability Channel
JEL Codes: G2; K2; K4; O16; P5
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Legal tradition (common law) (K15) | Financial development (O16) |
| Legal tradition (civil law) (K15) | Financial development (O16) |
| Adaptability of legal systems (K40) | Financial development (O16) |
| Legal tradition (common law) (K15) | Adaptability of legal systems (K40) |
| Legal tradition (civil law) (K15) | Adaptability of legal systems (K40) |