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What determines Financial Development? Culture, Institutions, or Trade

  • Nils Herger
  • Roland Hodler
  • Michael Lobsinger

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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File URL: http://degit.sam.sdu.dk/papers/degit_12/C012_033.pdf
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Paper provided by DEGIT, Dynamics, Economic Growth, and International Trade in its series DEGIT Conference Papers with number c012_033.

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Length: 28 pages JEL Classification: F36, G2, O16
Date of creation: Jun 2007
Date of revision:
Handle: RePEc:deg:conpap:c012_033
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  1. Rodrik, Dani & Subramanian, Arvind & Trebbi, Francesco, 2002. "Institutions Rule: The Primacy of Institutions Over Geography and Integration in Economic Development," CEPR Discussion Papers 3643, C.E.P.R. Discussion Papers.
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  8. Jeffrey D. Sachs, 2003. "Institutions Don't Rule: Direct Effects of Geography on Per Capita Income," NBER Working Papers 9490, National Bureau of Economic Research, Inc.
  9. Beck, Thorsten & Demirguc-Kunt, Asli & Levine, Ross, 2003. "Law, endowments, and finance," Journal of Financial Economics, Elsevier, vol. 70(2), pages 137-181, November.
  10. Rafael Di Tella & Alberto Ades, 1999. "Rents, Competition, and Corruption," American Economic Review, American Economic Association, vol. 89(4), pages 982-993, September.
  11. Easterly, W & Levine, R, 1996. "Africa's Growth Tragedy : Policies and Ethnic Divisions," Papers 536, Harvard - Institute for International Development.
  12. Robert E. Hall & Charles I. Jones, 1999. "Why Do Some Countries Produce So Much More Output per Worker than Others?," NBER Working Papers 6564, National Bureau of Economic Research, Inc.
  13. John Luke Gallup & Jeffrey D. Sachs & Andrew Mellinger, 1999. "Geography and Economic Development," CID Working Papers 1, Center for International Development at Harvard University.
  14. La Porta, Rafael & Florencio Lopez-de-Silanes & Andrei Shleifer & Robert W. Vishny, 1997. " Legal Determinants of External Finance," Journal of Finance, American Finance Association, vol. 52(3), pages 1131-50, July.
  15. Beck, Thorsten & Demirguc-Kunt, Asli & Levine, Ross, 1999. "A new database on financial development and structure," Policy Research Working Paper Series 2146, The World Bank.
  16. Huang, Yongfu & Temple, Jonathan, 2005. "Does External Trade Promote Financial Development?," CEPR Discussion Papers 5150, C.E.P.R. Discussion Papers.
  17. Levine, Ross, 2005. "Finance and Growth: Theory and Evidence," Handbook of Economic Growth, in: Philippe Aghion & Steven Durlauf (ed.), Handbook of Economic Growth, edition 1, volume 1, chapter 12, pages 865-934 Elsevier.
  18. Svaleryd, Helena & Vlachos, Jonas, 1999. "Markets for Risk and Openness to Trade: How are they Related?," SSE/EFI Working Paper Series in Economics and Finance 327, Stockholm School of Economics, revised 10 Sep 2000.
  19. Douglas Staiger & James H. Stock, 1997. "Instrumental Variables Regression with Weak Instruments," Econometrica, Econometric Society, vol. 65(3), pages 557-586, May.
  20. Rajan, Raghuram G. & Zingales, Luigi, 2003. "The great reversals: the politics of financial development in the twentieth century," Journal of Financial Economics, Elsevier, vol. 69(1), pages 5-50, July.
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  27. repec:ner:tilbur:urn:nbn:nl:ui:12-3125518 is not listed on IDEAS
  28. Daron Acemoglu & Simon Johnson, 2003. "Unbundling Institutions," NBER Working Papers 9934, National Bureau of Economic Research, Inc.
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