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When Does Legal Origin Matter?

  • Mohammad Amin

    ()

    (World Bank)

  • Priya Ranjan

    ()

    (Department of Economics, University of California-Irvine)

A vast literature documents better economic institutions in common law compared with civil law countries. The present paper argues that legal origin alone is insufficient to explain differences in the quality of economic institutions across countries. Rather, it is the interaction between legal origin and the quality of political institutions that is important. Empirical evidence from a cross-section of 90 countries on entry regulation, a measure of how business friendly economic institutions are towards firms, strongly supports our claim. For example, we find that the number of procedures required to start a business are lower in common law compared with civil law countries by 2.5 procedures or 24.3% of the sample mean. However, this difference varies sharply across the sample of countries with high and low levels of political accountability. It equals a large 3.4 procedures (37% of the sample mean) for the former and a mere 1.1 procedures (9.7% of the sample mean) for the latter. We conclude that legal origin matters for the quality of economic institutions but only when political accountability is high. We provide a plausible explanation for this phenomenon based on recent findings in the literature on political economy.

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File URL: http://www.economics.uci.edu/files/docs/workingpapers/2008-09/ranjan-12.pdf
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Paper provided by University of California-Irvine, Department of Economics in its series Working Papers with number 080912.

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Length: 41 pages
Date of creation: Dec 2008
Date of revision:
Handle: RePEc:irv:wpaper:080912
Contact details of provider: Postal: Irvine, CA 92697-3125
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Web page: http://www.economics.uci.edu/

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  1. Beck, Thorsten & Demirguc-Kunt, Asli & Levine, Ross, 2002. "Law and finance : why does legal origin matter?," Policy Research Working Paper Series 2904, The World Bank.
  2. repec:reg:rpubli:274 is not listed on IDEAS
  3. Clarke, George R.G. & Cull, Robert & Martinez Peria, Maria Soledad, 2006. "Foreign bank participation and access to credit across firms in developing countries," Journal of Comparative Economics, Elsevier, vol. 34(4), pages 774-795, December.
  4. Daron Acemoglu & James A. Robinson, 2008. "Persistence of Power, Elites, and Institutions," American Economic Review, American Economic Association, vol. 98(1), pages 267-93, March.
  5. David Stasavage, 2000. "Private Investment and Political Uncertainty," STICERD - Development Economics Papers - From 2008 this series has been superseded by Economic Organisation and Public Policy Discussion Papers 25, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE.
  6. Casey B. Mulligan & Andrei Shleifer, 2004. "Population and Regulation," NBER Working Papers 10234, National Bureau of Economic Research, Inc.
  7. Treisman, Daniel, 2000. "The causes of corruption: a cross-national study," Journal of Public Economics, Elsevier, vol. 76(3), pages 399-457, June.
  8. Dabla-Norris, Era & Gradstein, Mark & Inchauste, Gabriela, 2008. "What causes firms to hide output? The determinants of informality," Journal of Development Economics, Elsevier, vol. 85(1-2), pages 1-27, February.
  9. Thorsten Beck & Asli Demirgüç-Kunt & Vojislav Maksimovic, 2005. "Financial and Legal Constraints to Growth: Does Firm Size Matter?," Journal of Finance, American Finance Association, vol. 60(1), pages 137-177, 02.
  10. David Stasavage, 2002. "Private Investment and Political Institutions," Economics and Politics, Wiley Blackwell, vol. 14(1), pages 41-63.
  11. Nicola Gennaioli & Andrei Shleifer, 2007. "The Evolution of Common Law," Journal of Political Economy, University of Chicago Press, vol. 115, pages 43-68.
  12. Besley, Timothy J. & Prat, Andrea, 2002. "Handcuffs for the Grabbing Hand? Media Capture and Government Accountability," CEPR Discussion Papers 3132, C.E.P.R. Discussion Papers.
  13. Beck, Thorsten & Clarke, George & Groff, Alberto & Keefer, Philip & Walsh, Patrick, 2000. "New tools and new tests in comparative political economy - the database of political institutions," Policy Research Working Paper Series 2283, The World Bank.
  14. George J. Stigler, 1971. "The Theory of Economic Regulation," Bell Journal of Economics, The RAND Corporation, vol. 2(1), pages 3-21, Spring.
  15. repec:ner:tilbur:urn:nbn:nl:ui:12-3125511 is not listed on IDEAS
  16. David Strömberg, 2004. "Radio's Impact on Public Spending," The Quarterly Journal of Economics, MIT Press, vol. 119(1), pages 189-221, February.
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