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Law and Finance: Why Does Legal Origin Matter?

Reading for Tuesday, 4 September. By Thorsten Beck, Ash Demirgiic-Kunt, and Ross Levine.

A growing body of work suggests that cross-country differences in legal origin help explain differences in financial development.  Beck, Demirguc-Kunt, and Levine access two theories of why legal origin influences financial development.  First, the "political" channel stresses that (1) legal traditions differ in the priority they give to the rights of individual investors compared with the state, and that (2) this has repurcussions for the development of property rights and financial markets.  Second the "adaptability" channel hold that (1) legal traditions differ in their ability to adjust to changing commercial circumstances, and (2) 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.  The authors use historical comparisons and cross-country regressions to assess the validity of these two channels.

Download File: beck_et_al.pdf

Center for Comparative and Global Research