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Constitutions and Commitment: Evidence on the Relation Between Institutions and the Cost of Capital

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  • Sussman, Nathan
  • Yafeh, Yishay

Abstract

This Paper challenges the North and Weingast (1989) view that institutional reforms and better protection of property rights lead to economic growth through a reduction in interest rates, and that a mechanism of this type accounted for Britain’s ascendancy to economic supremacy. We show that, in contrast with North and Weingast, the risk premium on British sovereign debt remained high and even increased in the decades following the Glorious Revolution, and that during much of the 18th century interest rates in Britain fluctuated considerably in response to wars and political instability. We also show that debt per capita – a measure of financial deepening – remained lower in Britain than in Holland for over a century after the institutional changes described by North and Weingast. Finally, we show that British interest rates moved in tandem with interest rates in Holland, suggesting that Britain did not embark on a different path following the institutional changes of the late 17th century. We conclude that, in the short run, institutional reforms do not lead to higher growth by lowering the cost of capital.

Suggested Citation

  • Sussman, Nathan & Yafeh, Yishay, 2004. "Constitutions and Commitment: Evidence on the Relation Between Institutions and the Cost of Capital," CEPR Discussion Papers 4404, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:4404
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    Citations

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    Cited by:

    1. Temin, Peter & Voth, Hans-Joachim, 2005. "Credit rationing and crowding out during the industrial revolution: evidence from Hoare's Bank, 1702-1862," Explorations in Economic History, Elsevier, vol. 42(3), pages 325-348, July.
    2. Temin, Peter & Voth, Hans-Joachim, 2004. "Financial Repression in a Natural Experiment: Loan Allocation and the Change in the Usury Laws in 1714," CEPR Discussion Papers 4452, C.E.P.R. Discussion Papers.
    3. Brigitte Evelyne Granville & Carol Scott Leonard, 2006. "Do institutions matter for technological change in transition economies? The case of the Russia's 89 regions and republics," UCL SSEES Economics and Business working paper series 70, UCL School of Slavonic and East European Studies (SSEES).
    4. Temin, Peter & Voth, Hans-Joachim, 2006. "Banking as an emerging technology: Hoare's Bank, 1702 1742," Financial History Review, Cambridge University Press, vol. 13(02), pages 149-178, October.
    5. Peter Temin & Hans-Joachim Voth, 2008. "Interest Rate Restrictions in a Natural Experiment: Loan Allocation and the Change in the Usury Laws in 1714," Economic Journal, Royal Economic Society, vol. 118(528), pages 743-758, April.
    6. Voth, Joachim, 2005. "Credit Rationing and Crowding Out During the Industrial Revolution," Department of Economics, Working Paper Series qt4qw3v8q6, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
    7. Peter Temin & Hans-Joachim Voth, 0000. "The Speed of the Financial Revolution: Evidence from Hoare's Bank," Working Papers 212, Barcelona Graduate School of Economics.
    8. Granville, Brigitte & Leonard, Carol S., 2010. "Do Informal Institutions Matter for Technological Change in Russia? The Impact of Communist Norms and Conventions, 1998-2004," World Development, Elsevier, vol. 38(2), pages 155-169, February.
    9. Peter Temin & Joachim Voth, 2005. "Private borrowing during the financial revolution: Hoare’s Bank and its customers, 1702-1724," Economics Working Papers 860, Department of Economics and Business, Universitat Pompeu Fabra.
    10. Jha, Saumitra, 2008. "Shares, Coalition Formation and Political Development: Evidence from Seventeenth Century England," Research Papers 2005, Stanford University, Graduate School of Business.

    More about this item

    Keywords

    financial development; institutions;

    JEL classification:

    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • N20 - Economic History - - Financial Markets and Institutions - - - General, International, or Comparative
    • N23 - Economic History - - Financial Markets and Institutions - - - Europe: Pre-1913

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