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Beyond legal origin and checks and balances : political credibility, citizen information, and financial sector development

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  • Keefer, Philip

Abstract

The existing literature emphasizes and contrasts the role of political checks and balances and legal origin in determining the pace of financial sector development. This paper expands substantially on one aspect of this debate: the fact that government actions that promote financial sector development, whether prudent financial regulation or secure property and contract rights, are public goods and sensitive to political incentives to provide public goods. Tests of hypotheses emanating from this argument yield four new conclusions. First, two key determinants of those incentives-the credibility of pre-electoral political promises and citizen information about politician decisions-systematically promote financial sector development. Second, these political factors, along with political checks and balances, operate in part through their influence on the security of property rights, an argument asserted but not previously tested. Third, contrary to findings elsewhere in the literature, the political determinants of financial sector development are significant even in the presence of controls for legal origin. Finally, and again in contrast to the literature, the evidence here suggests that legal origin primarily proxies for political phenomena. Legal origin is a largely insignificant determinant of financial sector development whenthose phenomena are fully taken into account.

Suggested Citation

  • Keefer, Philip, 2007. "Beyond legal origin and checks and balances : political credibility, citizen information, and financial sector development," Policy Research Working Paper Series 4154, The World Bank.
  • Handle: RePEc:wbk:wbrwps:4154
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    References listed on IDEAS

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    1. Kroszner, Randall S & Stratmann, Thomas, 1998. "Interest-Group Competition and the Organization of Congress: Theory and Evidence from Financial Services' Political Action Committees," American Economic Review, American Economic Association, vol. 88(5), pages 1163-1187, December.
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    6. White, Eugene, 1995. "Deposit insurance," Policy Research Working Paper Series 1541, The World Bank.
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    11. Kroszner, Randall S & Strahan, Philip E, 1996. " Regulatory Incentives and the Thrift Crisis: Dividends, Mutual-to-Stock Conversions, and Financial Distress," Journal of Finance, American Finance Association, vol. 51(4), pages 1285-1319, September.
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    Cited by:

    1. Eicher, Theo S. & Schreiber, Till, 2010. "Structural policies and growth: Time series evidence from a natural experiment," Journal of Development Economics, Elsevier, vol. 91(1), pages 169-179, January.
    2. Haggard, Stephan & Tiede, Lydia, 2011. "The Rule of Law and Economic Growth: Where are We?," World Development, Elsevier, vol. 39(5), pages 673-685, May.
    3. repec:eee:finsta:v:29:y:2017:i:c:p:13-35 is not listed on IDEAS
    4. Thorsten Beck & Samuel Munzele Maimbo, 2013. "Financial Sector Development in Africa : Opportunities and Challenges," World Bank Publications, The World Bank, number 11881, June.

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    Keywords

    Economic Theory&Research; Privatization; Political Economy; Inequality; Legal Products;

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