Research on Legal Origin, Regulation & Institutions

Doing Business considers the following list of papers as relevant for research on the role regulations and institutions play in economic growth. Some papers—denoted with an asterisk (*)—use Doing Business data for their empirical analysis. If we've missed any important research, please let us know.

Author(s): Mark J. Roe and Jordan I. Siegel

Journal: Journal of Economic Literature, Vol. XLVII (September 2009)

Abstract: Strong financial markets are widely thought to propel economic development, with many in finance seeing legal tradition as fundamental to protecting investors sufficiently for finance to flourish. Kenneth Dam finds that the legal tradition view inaccurately portrays how legal systems work, how laws developed historically, and how government power is allocated in the various legal traditions. Yet, after probing the legal origins’ literature for inaccuracies, Dam does not deeply develop an alternative hypothesis to explain the world’s differences in financial development. Nor does he challenge the origins core data, which coul be origins’ trump card. Hence, his analysis will not convince many economists, despite that his legal learning suggests conceptual and factual difficulties for the legal origins explanations. Yet, a dense political economy explanation is already out there and the origins-based data has unexplored weaknesses consistent with Dam’s contentions. Knowing if the origins view is truly fundamental, flawed, or secondary is vital for financial development policy making because policymakers who believe it will pick policies that imitate what they think to be the core institutions of the preferred legal tradition. But if they have mistaken views, as Dam indicates they might, as to what the legal traditions’ institutions really are and which types of laws are effective, or what is really most important to financial development, they will make policy mistakes—potentially serious ones.

Author(s): Avinash Dixit

Journal: American Economic Review, 99(1): 5–24, 2009

Abstract: No abstract

Author(s): Thorsten Beck. Asli Demirgüç-Kunt, Ross Levine

Journal: National Bureau of Economic Research, Working Paper No. 9379, December 2002

Abstract: New research suggests that cross-country differences in legal origin help explain differences in financial development. This paper empirically assesses two theories of why legal origin influences financial development. First, the “political” channel stresses that (i) legal traditions differ in the priority they give to the rights of individual investors vis-à-vis the state and (ii) this has repercussions for the development of property rights and financial markets. Second, the “adaptability” channel holds that (i) legal traditions differ in their ability to adjust to changing commercial circumstances and (ii) legal systems that adapt quickly to minimize the gap between the contracting needs of the economy and the legal system’s capabilities will foster financial development more effectively than would more rigid legal traditions. We use historical comparisons and cross-country regressions to assess the validity of these two channels. We find that legal origin matters for financial development because legal traditions differ in their ability to adapt efficiently to evolving economic conditions.

Author(s): Ulrike Malmendier

Journal: Journal of Economic Literature 2009, 47:4, 1076–1108

Abstract: What are the key determinants of financial development and growth? A large literature debates the relative importance of countries’ legal and political environment. In this paper, I present evidence from ancient Rome, where an early form of shareholder company, the societas publicanorum, developed. I show that the societas publicanorum flourished in a legally underdeveloped but politically supportive environment (Roman Republic) and disappeared when Roman law reached its height of legal sophistication but the political environment grew less supportive (Roman Empire). In the Roman case, legal development appears to have mattered little as long as the law as practiced was flexible and adapted to economic needs. The “law as practiced,” in turn, reflected prevalent political interests. After discussing parallels in more recent history, I provide a brief overview of the literature on law and finance and on politics and finance. The historical evidence suggests that legal systems may be less of a technological constraint for growth than previously thought—at least “at the origin.”

Author(s): Rafael La Porta, Florencio Lopez-de-Silanes, Andrei Shleifer, Robert W. Vishny

Journal: National Bureau of Economic Research, Working Paper No. 5879, January 1997

Abstract: Using a sample of 49 countries, we show that countries with poorer investor protections, measured by both the character of legal rules and the quality of law enforcement, have smaller and narrower capital markets. These findings apply to both equity and debt makers. In particular, French civil law countries have both the weakest investor protections and the least developed capital markets, especially as compared to common law countries.

Author(s): Gani Aldashev

Journal: Oxford Review of Economic Policy 25:2, 257-270, 2009

Abstract: This article reviews some of the recent literature on the relationship between the legal system and economic development. We also look at the historical, socio-cultural, and political factors that explain the differences in the characteristics of legal systems across countries and thus affect the link between the legal environment and economic outcomes. Although the field of law and economics of developing countries is still in its youth, it is growing rapidly and is a fertile ground for exciting new findings, both theoretical and empirical. Further progress in this field is likely to come from the studies of the elements of the legal system other than the substantive law (enforcement and dispute resolution) and should move beyond specific analyses of the impact of particular success or failure stories towards more general analyses of the determinants and outcomes of successful legal institutions.

Author(s): Edward Glaeser and Andrei Shleifer

Journal: Quarterly Journal of Economics 117 (4): 1193–229, 2002

Abstract: A central requirement in the design of a legal system is the protection of law enforcers from coercion by litigants through either violence or bribes. The higher the risk of coercion, the greater is the need for protection, and control of law enforcers by the state. Such control, however, also makes law enforcers beholden to the state, and politicizes justice. This perspective explains why, starting in the twelfth and thirteenth centuries, the relatively more peaceful England developed trials by independent juries, while the less peaceful France relied on state-employed judges to resolve disputes. It may also explain many differences between common and civil law traditions with respect to both the structure of legal systems and the observed social and economic outcomes.

Author(s): Siemon Djankov, Caralee McLiesh and Rita Ramalho

Journal: Economics Letters 92 (3): 395–401, 2006

Abstract: Using objective measures of business regulations in 135 countries, we establish that countries with better regulations grow faster. Improving from the worst quartile of business regulations to the best implies a 2.3 percentage point increase in annual growth.

Author(s): Katharina Pistor

Journal: Brigham Young University Law Review - Nbr. 20096

Abstract: Using objective measures of business regulations in 135 countries, we establish that countries with better regulations grow faster. Improving from the worst quartile of business regulations to the best implies a 2.3 percentage point increase in annual growth.

Author(s): Daron Acemoglu, James Robinson, and Simon Johnson

Journal: American Economic Review 91 (5): 1369–1401, 2001

Abstract: We exploit differences in European mortality rates to estimate the effect of institutions on economic performance. Europeans adopted very different colonization policies in different colonies, with different associated institutions. In places where Europeans faced high mortality rates, they could not settle and were more likely to set up extractive institutions. These institutions persisted to the present. Exploiting differences in European mortality rates as an instrument for current institutions, we estimate large effects of institutions on income per capita. Once the effect of institutions is controlled for, countries in Africa or those closer to the equator do not have lower incomes.

Author(s): Aron Balas, Rafael La Porta, Florencio Lopez-de-Silanes, and Andrei Shleifer*

Journal: American Economic Journal: Economic Policy 2009, 1:2, 138–162

Abstract: Simeon Djankov et al. (2003) introduce a measure of the quality of contract enforcement—the formalism of civil procedure—for 109 countries as of 2000. For 40 of these countries, we compute procedural formalism every year since 1950. We find that large differences in procedural formalism between common and civil law countries existed in 1950 and widened by 2000. For this area of law, the findings are inconsistent with the hypothesis that national legal systems are converging, and support the view that legal origins exert long lasting influence on legal rules.

Author(s): Rafael La Porta, Florencio Lopez-de-Silanes, and Andrei Shleifer*

Journal: Journal of Economic Literature 2008, 46:2, 285–332

Abstract: In the last decade, economists have produced a considerable body of research suggesting that the historical origin of a country’s laws is highly correlated with a broad range of its legal rules and regulations, as well as with economic outcomes. We summarize this evidence and attempt a unified interpretation. We also address several objections to the empirical claim that legal origins matter. Finally, we assess the implications of this research for economic reform.

Author(s): Ross Levine

Journal: Journal of Money, Credit and Banking, Volume 30, Issue 3, Pages 596-613, August 1998

Abstract:  This paper examines the relationship between the legal system and banking development and traces this connection through to long-run rates of per capita GDP growth, capital stock growth, and productivity growth. The data indicate that countries where the legal system (1) emphasizes creditor rights and (2) rigorously enforces contracts have better-developed banks than countries where laws do not give a high priority to creditors and where enforcement is lax. Furthermore, the exogenous component of banking development - the component defined by the legal environment - is positively and robustly associated with per capita growth, physical capital accumulation, and productivity growth.

Author(s): Hernando De Soto

Journal: New York: Harper and Row, 1989

Abstract: This forcefully argued study suggests that the black market of unregistered businesses, home construction, etc., which dominates Peru's economy is a spontaneous and creative popular response to the state's incapacity to spur production and distribution. De Soto contends that the "informal economy" points the way to resolving the problems of underdevelopment through a reduction of the state and the expansion of free enterprise. Remarkably congruent with Reaganomics, this approach has been propagated vigorously during the 1980s with U.S. government support. It remains to be seen how it will fare in a period of expanding populism in Latin America.

Author(s): Oliver Hart, Andrei Shleifer, and Robert Vishny

Journal: Quarterly Journal of Economics 112 (4): 1127–1161, 1997

Abstract: When should a government provide a service in-house, and when should it contract out provision? We develop a model in which the provider can invest in improving the quality of service or reducing cost. If contracts are incomplete, the private provider has a stronger incentive to engage in both quality improvement and cost reduction than a government employee has. However, the private contractor's incentive to engage in cost reduction is typically too strong because he ignores the adverse effect on noncontractible quality. The model is applied to understanding the costs and benefits of prison privatization.

Author(s): Rafael La Porta, Florencio Lopez-de-Silanes, Andrei Shleifer, and Robert W. Vishny

Journal: Journal of Law, Economics, and Organization 15(1): 222–79, 1999

Abstract: We investigate empirically the determinants of the quality of governments in a large cross-section of countries. We assess government performance using measures of government intervention, public sector efficiency, public good provision, size of government, and political freedom. We find that countries that are poor, close to the equator, ethno-linguistically heterogeneous, use French or socialist laws, or have high proportions of Catholics of Muslims exhibit inferior government performance. We also find that the larger governments tend to be the better performing ones. The importance of (reasonably) exogenous historical factors in explaining the variation in government performance across countries sheds light on the economic, political, and cultural theories of institutions.

Author(s): Edwards Glaeser and Andrei Shleifer

Journal:  Journal of Economic Literature 41 (2): 401–425, 2003

Abstract: The Progressive Era of the early twentieth-century U.S. saw significant growth of government regulation of business. We model the choice of law enforcement strategy between private litigation over accidents, regulation of precautions, a combination of the two, and doing nothing. Any of these strategies can be subverted by private parties, at a cost. Private litigation may be more vulnerable to subversion than regulation, especially as the scale of enterprise grows. The rise of regulation is seen as an efficient response to subversion of justice. The model makes sense of the progressive reform agenda. It may also help explain what institutions of law and order are appropriate in what circumstances-a crucial issue for transition economies and emerging markets.

Author(s): Carmine Guerriero

Journal:  Journal of Comparative Economics

Abstract:  Outcomes are deeply influenced by the set of institutions used to aggregate the citizens’ preferences over the harshness of punishment, i.e., the legal tradition. I show that while under common law appellate judges’ biases offset one another at the cost of legal uncertainty, under civil law the legislator chooses a certain legal rule that is biased only when he favors special interests, i.e., when preferences are sufficiently heterogeneous and/or political institutions are sufficiently inefficient. Thus, common law can produce better outcomes only under this scenario. To test this prediction, I construct a novel continuous measure of legal traditions for 49 transplants, many of which reformed the transplanted institutions, and I devise an instrumental variables approach dealing with the endogeneity of both legal and political institutions. The evidence I obtain is robust across several strategies, confirms the model implications, and stresses the relevance of distinguishing between proxies measuring only the technological efficiency of the law and those picking up also the citizenry’s satisfaction with its cultural content.