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Finance and Politics: A Review Essay Based on Kenneth Dam's Analysis of Legal Traditions in The Law-Growth Nexus

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  • Mark J. Roe
  • Jordan I. Siegel

Abstract

Strong financial markets are widely thought to propel economic development, with many in finance seeing legal tradition as fundamental to protecting investors sufficiently for finance to flourish. Kenneth Dam finds that the legal tradition view inaccurately portrays how legal systems work, how laws developed historically, and how government power is allocated in the various legal traditions. Yet, after probing the legal origins' literature for inaccuracies, Dam does not deeply develop an alternative hypothesis to explain the world's differences in financial development. Nor does he challenge the origins core data, which could be origins' trump card. Hence, his analysis will not convince many economists, despite that his legal learning suggests conceptual and factual difficulties for the legal origins explanations. Yet, a dense political economy explanation is already out there and the origins-based data has unexplored weaknesses consistent with Dam's contentions. Knowing if the origins view is truly fundamental, flawed, or secondary is vital for financial development policy making because policymakers who believe it will pick policies that imitate what they think to be the core institutions of the preferred legal tradition. But if they have mistaken views, as Dam indicates they might, as to what the legal traditions' institutions really are and which types of laws are effective, or what is really most important to financial development, they will make policy mistakes -- potentially serious ones.

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Bibliographic Info

Article provided by American Economic Association in its journal Journal of Economic Literature.

Volume (Year): 47 (2009)
Issue (Month): 3 (September)
Pages: 781-800

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Handle: RePEc:aea:jeclit:v:47:y:2009:i:3:p:781-800

Note: DOI: 10.1257/jel.47.3.781
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  1. Roe, Mark J., 2007. "Juries and the political economy of legal origin," Journal of Comparative Economics, Elsevier, vol. 35(2), pages 294-308, June.
  2. Matias Braun & Claudio Raddatz, 2008. "The Politics of Financial Development: Evidence from Trade Liberalization," Journal of Finance, American Finance Association, vol. 63(3), pages 1469-1508, 06.
  3. Easterly, William, 2007. "Inequality does cause underdevelopment: Insights from a new instrument," Journal of Development Economics, Elsevier, vol. 84(2), pages 755-776, November.
  4. Richard Sylla, 2006. "Schumpeter Redux: A Review of Raghuram G. Rajan and Luigi Zingales's Saving Capitalism from the Capitalists," Journal of Economic Literature, American Economic Association, vol. 44(2), pages 391-404, June.
  5. Roe, Mark J., 2002. "Political Determinants of Corporate Governance: Political Context, Corporate Impact," OUP Catalogue, Oxford University Press, number 9780199240746, September.
  6. Jackson, Howell E. & Roe, Mark J., 2009. "Public and private enforcement of securities laws: Resource-based evidence," Journal of Financial Economics, Elsevier, vol. 93(2), pages 207-238, August.
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Cited by:
  1. Hans Degryse & Thomas Lambert & Armin Schwienbacher, 2013. "The Political Economy of Financial Systems: Evidence from Suffrage Reforms in the Last Two Centuries," CESifo Working Paper Series 4527, CESifo Group Munich.
  2. Naomi R. Lamoreaux, 2014. "Revisiting American Exceptionalism: Democracy and the Regulation of Corporate Governance in Nineteenth-Century Pennsylvania," NBER Chapters, in: Enterprising America: Businesses, Banks, and Credit Markets in Historical Perspective National Bureau of Economic Research, Inc.
  3. Claessens, Stijn & Yurtoglu, B. Burcin, 2013. "Corporate governance in emerging markets: A survey," Emerging Markets Review, Elsevier, vol. 15(C), pages 1-33.
  4. Amat Adarov & Robert Tchaidze, 2011. "Development of Financial Markets in Central Europe," IMF Working Papers 11/101, International Monetary Fund.
  5. Asongu Simplice, 2011. "Law, Finance and Investment: does legal origin matter in Africa?," Working Papers 11/013, African Governance and Development Institute..
  6. Naomi R. Lamoreaux, 2014. "Revisiting American Exceptionalism: Democracy and the Regulation of Corporate Governance in Nineteenth-Century Pennsylvania," NBER Working Papers 20231, National Bureau of Economic Research, Inc.
  7. Jean-Claude Cosset & Charles Martineau & Anis Samet, 2012. "Do Political Institutions Affect the Choice of the U.S. Cross-Listing Venue?," Cahiers de recherche 1210, CIRPEE.
  8. Haque, Faizul & Arun, Thankom & Kirkpatrick, Colin, 2011. "The political economy of corporate governance in developing economies: The case of Bangladesh," Research in International Business and Finance, Elsevier, vol. 25(2), pages 169-182, June.

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