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What Determines Financial Development? Culture, Institutions or Trade

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  • Nils Herger

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  • Roland Hodler
  • Michael Lobsiger

Abstract

This paper endeavours to explain the vast differences in the size of capital markets across countries, by drawing together theories emphasising cultural values, dysfunctional institutions, or impediments to trade as obstacles to financial development. To account for endogeneity, instrumental variables pertaining to culture, geography, and colonial history are employed. We find that trade openness and institutions constraining the political elite from expropriating financiers exhibit a strong positive effect on the size of capital markets. Conversely, cultural beliefs and the cost of enforcing financial contracts seem not to introduce significant obstacles for financial development.
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Suggested Citation

  • Nils Herger & Roland Hodler & Michael Lobsiger, 2008. "What Determines Financial Development? Culture, Institutions or Trade," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 144(3), pages 558-587, October.
  • Handle: RePEc:spr:weltar:v:144:y:2008:i:3:p:558-587 DOI: 10.1007/s10290-008-0160-1
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Mondher Cherif & Christian Dreger, 2016. "Institutional Determinants of Financial Development in MENA countries," Review of Development Economics, Wiley Blackwell, vol. 20(3), pages 670-680, August.
    2. Irwan Trinugroho & Agusman Agusman & Mochammad Doddy Ariefianto & Darsono Darsono & Amine Tarazi, 2015. "Determinants of cross regional disparity in financial deepening: Evidence from Indonesian provinces," Economics Bulletin, AccessEcon, vol. 35(2), pages 896-910.
    3. repec:eee:empfin:v:44:y:2017:i:c:p:108-124 is not listed on IDEAS
    4. Roxana Mihet, 2013. "Effects of culture on firm risk-taking: a cross-country and cross-industry analysis," Journal of Cultural Economics, Springer;The Association for Cultural Economics International, pages 109-151.
    5. Bhattacharyya, Sambit & Hodler, Roland, 2014. "Do Natural Resource Revenues Hinder Financial Development? The Role of Political Institutions," World Development, Elsevier, pages 101-113.
    6. Roland Hodler, 2011. "Institutions, Trade, and the Political Economy of Financial Development," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 167(3), pages 445-464, September.
    7. Vivien Kappel, 2010. "The Effects of Financial Development on Income Inequality and Poverty," CER-ETH Economics working paper series 10/127, CER-ETH - Center of Economic Research (CER-ETH) at ETH Zurich.
    8. Ang, James B. & Kumar, Sanjesh, 2014. "Financial development and barriers to the cross-border diffusion of financial innovation," Journal of Banking & Finance, Elsevier, vol. 39(C), pages 43-56.
    9. Sibel Bali Eryigit, 2010. "FINANCIAL DEVELOPMENT and INSTITUTIONS: A LITERATURE REVIEW," Anadolu University Journal of Social Sciences, Anadolu University, vol. 10(2), pages 111-122, May.

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