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The Quality of the Legal System, Firm Ownership, and Firm Size

  • Luc Laeven

    (International Monetary Fund and CEPR)

  • Christopher Woodruff

    (Graduate School of International Relations and Pacific Studies, University of California San Diego)

We show that firm size is increasing with the quality of the legal system in Mexico. A 1-standard-deviation improvement in the quality of the legal system is associated with a 0.15-0.30 standard deviation increase in firm size. We also show that the legal system affects firm size by reducing the idiosyncratic risk faced by firm owners. The legal system has a smaller impact on partnerships and corporations than on proprietorships, where risk is concentrated in a single owner. All of the findings are robust to instrumenting for legal quality using historical conditions. By focusing on firms in a single country, the data draw attention to the importance of informal institutions. Copyright by the President and Fellows of Harvard College and the Massachusetts Institute of Technology.

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File URL: http://www.mitpressjournals.org/doi/pdf/10.1162/rest.89.4.601
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Article provided by MIT Press in its journal The Review of Economics and Statistics.

Volume (Year): 89 (2007)
Issue (Month): 4 (November)
Pages: 601-614

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Handle: RePEc:tpr:restat:v:89:y:2007:i:4:p:601-614
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