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Working Paper Series
Unbundling
Institutions
Daron Acemoglu
Simon Johnson
Working Paper 03-29
July 2003
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t^L0O^
INSTITUTE
S£P 192003
I
Unbundling
Institutions*
Daron Acemoglu
Simon Johnson
MIT
MIT
July 2003.
Abstract
TMs
paper evaluates the importance of "property rights institutions", which protect
by the government and powerful ehtes, and "contracting
citizens against expropriation
institutions", wliich enable private contracts
between
citizens.
We
exploit exogenous
by colonial liistory, and dociunent strong firstbetween
property
rights
institutions
and the determinants of European
stage relationships
colonization strategy (settler mortality and population density before colonization), and
between contracting institutions and the identity of the colonizing power. Using tliis
instrumental variables approach, we find that property rights institutions have a first-order
effect on long-run economic growth, investment, and financial development. Contracting
institutions appear to matter only for the form of financial intermediation. A possible
explanation for this pattern is that individuals often find ways of altering the terms of
variation in both types of institutions driven
their formal
and informal contracts to avoid the adverse
effects of contracting institutions,
but axe imable to do so against the risk of expropriation.
Keywords: Contracts, Economic Grovrth, Financial Development, Institutions, Law
and Finance, Legal Formalism, Legal Origin, Pohtical Economy, Politics, Property Rights.
JEL Numbers: E44, G18, KOO, N20, P16, P17.
* We thank Simeon Djankov, Rafael La Porta, Amir Licht, Florencio Lopez-de-Silanes, Andrei Shleifer,
and seminar participants at the Canadian Institute for Advanced Research, MIT, and the University of
Illinois for helpful comments and discussions. We also thank Simeon Djankov, Ross Levine, Florencio
Lopez-de-Silanes, and Todd Mitton for generously providing data.
Introduction
1
Douglass North opens Structure and Change in Economic History by distinguishing be-
tween a "contract theory" of the state and a "predatory theory" of the state (1981, pp.
According to the
20-27).
legal
first
theory, the state
and associated
framework that enables private contracts to
facilitate
institutions provide the
economic transactions
According to the second, the state
"reduce transaction costs").
transferring resources from one group to another.
Throughout
is
(i.e.,
an instrument
for
book, North develops
liis
a story combining the two theories, and argues that good institutions will simultaneously
support private contracts and provide checks against expropriation by the government or
other pohtically powerful groups.
There
is
a growing consensus
among economists and
poUtical scientists that the broad
outlines of North's story are correct: the social, economic, legal,
of a society,
i.e.,
its "institutions,"
is
and
political organization
a primary determinant of economic performance.
However, Hke North, the contemporary hterature has not attempted to determine the
relative roles of institutions supporthig private contracts
institutions constraining
tions").^
Instead,
it
(
"contractmg institutions" ) and
government and ehte expropriation ("property rights
has documented the importance of a "cluster" of institutions that
include both contracting and private property protection elements.
This
is
weU-estabhshed theoretical arguments emphasizing each set of institutions.
ple, the contract
Wilhamson
(1975, 1985), links the efficiency of organizations
For exam-
and
societies to
what type
and enforced, and thus underscores the importance of con-
tracting institutions (see also
Grossman and Hart,
1986, Hart
and Moore, 1990, and Hart,
In contrast, other authors emphasize the importance of private property rights,
especially their protection against goverrunent expropriation (see,
1981,
in spite of
theory hterature, starting with Coase (1937, and especially 1960) and
of contracts can be written
1995).
institu-
De Long and
This paper
is
Slileifer,
among
others, Jones,
1993, or Olson, 2000).
an attempt to mibmidle the broad cluster of
institutions,
and learn more
we could refer to institutions constraining government expropriation as "political inwe did in a previous version of this paper. We decided not to use this term, since some
^Alternatively,
stitutions" as
readers interpreted
it
as referring to the type of constitution or to the ideological leanings of politicians
We opted for the
former term, since certain aspects of the legal institutions, such as the independence of the judiciary from
politics, may have an important effect on the security of property rights against expropriation by the
or society. In addition, "contracting institutions" could be called "legal institutions"
government or other powerful groups.
.
about the relative importance of contracting versus property rights institutions at the
macro
level.
Such an attempt has to
We will
tions.
start with
some proxies
two
for the
sets of institu-
proxy property rights institutions using two alternative measures: Pohtical
Risk Services' assessment of protection against government expropriation in a country,
and Polity IV's constraint on the executive measure.^ For contracting
would
like
ties are
ordinary citizens), and
able measures the
of collecting
we proxy
number
this
with the data on legal formahsm developed
Shleifer (2002, 2003).
TMs
on an unpaid check or evicting a non-paying tenant. These authors show
formahsm have higher
and lower perceived
longer delays in courts,
fairness
costs of enforcing simple contracts,
and
efficiency of the judiciary system.
then natural to presiuxie that greater legal formahsm
is
a proxy for worse contracting
In Ordinary Least Squares (OLS) regressions, long-run economic growth,
institutions."'
investment rates, and financial development are correlated with both contracting
and property
causal effect.
rights institutions.
To make
further progress,
of variation in both legal
formahsm and
However,
we need to
OLS
correlations
isolate potentially
and
Porta, Lopez-de-Silanes,
Lopez-de-Silanes,
(1960) and
Slileifer,
Merryman
exogenous sources
private property rights.
on the degree of
effect
Shleifer (2002, 2003), building
and Vishny (1997, 1998) and by
(1985),
legal
insti-
do not estabhsh a
Fortunately, the hterature offers potential instrrmients for both variables.
La
vari-
of formal legal procedures necessary to resolve a simple case
that coimtries with greater legal
tutions
we
a measure of costs of enforcing private contracts (contracts where both par-
and used by Djankov, La Porta, Lopez-de-Silanes, and
It is
institutions,
show that the
on work by La Porta,
legal scholars
such as Dawson
"legal origin" of a coimtry has
formahsm, and most relevant
Djankov,
an important
for our sample, coimtries
with
French legal origin have substantially higher degrees of legal formalism than Enghsh legal
origin countries. Moreover, as they point out, at least for former
legal
^
system can be thought of as "exogenous" because
,
Constraint on the executive
this
measure as a proxy
for
is
it
was
European
largely
colonies, the
imposed by colonial
clearly related to the "political institutions" of a society.
Our use
of
property rights institutions reflects the fact that political constraints on the
executive are closely interwoven with the security of property rights.
al. do not relate legal formalism to long-run economic growth. But this seems a natural
formalism affects the costs of contract enforcement (as Djankov et al. argue) and if contracting institutions are important for growth (as North and many others argue), then there should be
•^Djankov et
step:
an
if
legal
formalism on economic growth.
formalism data are available from the World Bank's Doing Business website, under the
heading Contract Enforcement: http://rru.worldbank.org/DoingBusiness/.
effect of legal
The
legal
powers.'*
Our previous work
Acemoglu, Johnson, and Robinson (2001, 2002), on the
in
other hand, shows the importance of the mortahty rate facing potential European settlers
and population density before colonization on the colonization strategy of Europeans.
Via
this channel, these variables
have influenced the
liistorical
and the degree of private property
society relations
development of the
state-
rights enforcement in the former
colonies today.
Our approach
in this
paper
is
to use a multiple instrumental variables (IV) strategy,
exploiting these sources of variation.
on the two
The
success of the multiple
sets of instruments to isolate the contracting
TV strategy depends
and property
rights charmels.
In this respect, colonial history offers an ideal setup. In the sample of former European
colonies, the legal
legal formalism,
system imposed by colonial powers has a strong
and almost no
effect
on measures of property
At the same time, both mortality rates
for potential
effect
on the degree
of
rights institutions today.
European
settlers
and population
density in 1500 have a large effect on current property rights institutions, and no impact
on measures of
The
ing:
we
legal formalism.
results of our empirical investigation using this multiple
find strong support for the
IV strategy
axe interest-
importance of property rights institutions on current
economic outcomes. Countries with greater constraints on politicians and eUtes, and more
protection against expropriation by these powerful groups, have substantially higher in-
come per capita
(i.e.,
liigher long-rmi
to the private sector relative to
growth
rates), greater investment rates,
GDP, and more developed
stock markets.
our findings indicate that the role of contracting institutions
with greater legal fonnalism have
for the effects of
less
is
more
credit
In contrast,
more Umited. Countries
developed stock markets. However, once we control
property rights institutions, legal formahsm seems to have no impact on
income per capita, the investment to
GDP
ratio,
and the private credit to
These results suggest that contracting institutions
affect the
GDP
ratio.
form of financial
inter-
^The La Porta et al. papers suggest a number of channels through which legal origin could affect
economic outcomes. In addition, Glaeser and Shleifer (2002) argue that the origin of the legal system
affects not only legal transactions, but also regulates the power of politically powerful groups. Mahoney
(2001) also argues that legal origin has a positive effect on economic growth through channels other
than legal formalism. If these views are correct, our IV estimates for the importance of legal formalism,
and therefore for contracting institutions, will be biased upwards. Consequently, our estimates of the
importance of contractual institutions can be interpreted as upper bounds. The reduced-form evidence
in the Appendix Table A3 does not show any evidence of a significant (direct or indirect) effect of legal
origin on economic growth, investment, bank credit, or stock market development once we control and
instrument for property rights.
mediation, but have less effect on economic growth, investment, and the overall level of
financial development. It
seems that society can function in the face of weak contracting
institutions without first-order
a significant
economic
risk of expropriation
costs,
but has a
much harder time deahng with
from the govermnent or other powerful groups.^ Our
terpretation, consistent with the simple
model we use to highhght the distinction between
contracting and property rights institutions,
is
that contracting institutions affect pri-
when
vate transactions and create ex post transfers between parties (for example,
face large costs of collecting
on
in-
their loans
lenders
from borrowers). Private contracts or other
reputation-based mechanisms can, at least in part, alleviate these problems.*' For example,
when
it is
more
difficult for lenders to collect
banks that can monitor
effectively will play a
credit relationsliips will develop.
ments therefore Umit the
on
their loans, interest rates increase, or
more important
role, or
reputation-based
Private contracting and alternative financial arrange-
effects of contracting institutions
and
legal formalism.
In contrast, protection of private property rights relates to the relationship between
the state and the citizens.
elites,
private citizens
When
there are no checks on the state, on pohticians, and on
do not have the security of property rights necessary
for investment.
In this case, they are also unable to enter into private arrangements to circumvent these
problems;
it is
impossible to write credible contracts with the state to prevent future
expropriation, since the state, with
arbiter of contracts (see
At
this point
its
monopoly of legitimate
violence,
is
the ultimate
Acemoglu, 2003a).
we have to emphasize the
limitations of our analysis. First, to the extent
that contracting and property rights institutions interact in regulating relations between
the state and citizens, or even between citizens, the interpretation of our results
'This pattern
La
is
also consistent with the results
We
barriers data
more
from Djankov,
number of
new business is legal formalism greater legal formalism, naturally, means more
when we use their measures for the total costs of opening new businesses, the main
Porta, Lopez-de-Silanes,
procedures to open a
procedures. However,
we obtain using the entry
is
and
Shleifer (2002).
find that the key determinant of the
—
determinant appears to be property rights institutions, not legal formalism. Therefore,
it
again appears
that contracting institutions aiTect the form of economic transactions, but have less impact on the overall
economic outcome (here, the total cost of opening a business).
®See the emphasis of, among others, Ellickson (1991) and Greif (1989) on the ability of individual
agents to substitute reputation-based arrangements for legal contracts. The World Bank's Doing Business
study has found that in countries such as Bulgaria, Egypt, Mozambique, and Tunisia, creditors structure
contracts so as to be able to seize collateral when a borrower defaults without using standard slow court
procedures (Djankov, 2003). Naturally, as also highlighted by the theoretical model below, there may
exist a certain threshold beyond which contracting institutions may matter more, and consequently, our
results here are consistent with the notion that a substantial worsening in contracting institutions could
have significant economic implications.
difficult/
Second, our "property rights institutions" are
and could
reflect
the
eff'ect
In addition to work by
still
somewhat
of a black box,
of other political or non-pohtical institutional features.^
La Porta
et al.,
Djaakov
et
al.,
and Acemoglu
et al., the
papers closest to our work are Beck, Demirgiig-Kuiit, and Levine (2003a, 2003b), and
Rajan and Zingales
development.
origin
(2003), wliich critically evaluate the
eff'ect
of legal origm
on
financial
Beck, Demirgiig-Kunt, and Levine (2003a) find evidence that both legal
and potential
settler mortality
matter
for financial
development.^ However, they
only estimate reduced-form relationsliips and do not specify the mechanisms tlirough
wliich legal origin
may
and Levine (2003b)
test
affect
economic and financial outcomes. Beck, Demirgtig-Kunt,
whether
legal origin
matters because
it
affects state control over
the judiciary, or because some legal systems are more "adaptable" than others.
They do
not address the nature or origin of property rights institutions. ^°
Rajan and Zingales (2003)
off'er
of investor protection in Europe.
an
"interest
group" explanation
They argue that changes
for the
in financial
development
arrangements at
the turn of the twentieth century are evidence against "time invariant" explanations,
such as the legal origin approach, and instead support their theory in which incumbent
producers oppose financial development to prevent entry from newcomers. In contrast, in
our model and empirical work, we focus on the effect of legal origin on legal formahsm,
and show that contracting
institutions
and
legal
formalism generally matter
less
than
property rights institutions for credit, investment, and long-rim economic growth.^^
^But
in
our defense, we find no evidence in the data
politicians
and
political elites are in
for
a significant interaction effect between
formalism also determines how constrained
practice, this would create an upward bias in our estimates for the
property rights and contracting institutions. Moreover,
if
legal
importance of contracting institutions.
'*In Acemoglu, Johnson, and Robinson (2001, 2002), we provide detaOed evidence that the effects
of mortality rates for potential European settlers and population density in 1500 are working through
institutions, and not through geographic, religious, or some other omitted factors.
'^Levine (2002), Beck and Levine (2002), and Demirgug-Kunt and Maksimovic (2002) all find a link
between legal origin and both the level of financial development and the extent to which external finance
is market- rather than bank-based. Levine (2003) reports results where legal origin explains the level of
financial development across countries and these in turn account for differences in long-run growth.
^''See also Berkowitz, Pistor, and Richard (2003), who argue that countries that developed their own
adapted any "transplanted" law, have a more effective legal system,
and Johnson, McMillan, and Woodruff (2002), who present micro evidence from five post-communist
countries showing that effective property rights matter more for firm investment than financial constraints.
Finally, there is also some recent work investigating which type of institutions matter more for economic outcomes. For example, Persson and Tabellini (1999) find that within the set of democracies,
presidential regimes have smaller governments and majoritarian (non-proportional representation) electoral systems are correlated with less government spending and less welfare spending. Barro (1997), on
the other hand, investigates the relative importance of rule of law and democracy in stimulating economic
legal systems, or that substantially
' ^
Section 2 develops a simple model to liighlight
how
contracting
and property
rights
different effects
on economic outcomes. Section 3 discusses our
empirical strategy and the basic data.
Section 4 provides details on the sample and
institutions
might have
descriptive statistics.
Section 5 shows some basic univariate results. Section 6 provides
our main results, contrasting the impact of contracting and property rights institutions
on a range of economic outcomes.
It also
contains robustness checks. Section 7 concludes.
Theory
2
We now
outhne a simple reduced-form model to higlihght how differences in contract-
and property
ing
rights institutions affect financial
We
and economic outcomes.
think
of contracting institutions as mainly affecting the costs of enforcing private contracts.
Property rights institutions, on the other hand, determine the interaction between individuals and the government (and the pohtical ehtes
who
property rights institutions do not constrain
these eUtes are
elites,
control the government).
more Ukely
When
to violate
the property rights of individual producers and expropriate their incomes or assets.
The pm-pose
of this
model
is
not to develop a micro-founded analysis of financial
intermediation or the role of property rights institutions, but simply to higlihght issues
that will help with interpretation of our empirical results. In particular, the model
trates how,
under certain circumstances, contracting institutions
of financial transactions but have relatively Umited effects
on the
may
illus-
influence the form
overall level of financial
intermediation, investment, and output, because individuals can vary the terms of their
contracts ex ante to deal with the ex post costs of contract enforcement.
The Environment
2.1
The model
and the
for
lasts for
elite.
one period and consists of three groups of agents: producers, lenders,
All agents are risk neutral.
investment or consumption.
have
sufficient
We
There
is
a imique good that can be used
normalize the number of producers to
1.
Lenders
funds to lend to producers, but no investment opportunities. Producers
have productive investment opportimities but no funds to undertake these investments.
These studies typically do not isolate an exogenous source of variation in institutions, so the
reflect omitted factors or be driven by differential measurement error (hence attenuation bias)
various measures of institutions.
growth.
results
in
may
Finally, elites
do not have a directly productive
role,
but control the state apparatus, and
can use their poUtical power to expropriate the incomes of other groups in
We will
^^
think of contracting institutions as regulating the relationsMp between lenders
and producers, and property
rights uistitutions as affecting the relationship
ducers and lenders on the one hand and the
Each producer can produce a >
elite
distribution of Cj in the population
is
e^
when
them needs
this using either a debt contract or
other.
good by investing
unit of loan to a producer with a debt contract
to borrow
1
-I-
m'^
administrative costs, or costs of collecting funds from savers.
R that
The
G {e).
unit from the lenders.
We
an equity contract.
is 1
Each
miit.
1
she undertakes production.
discussion of the debt contract, returning to equity contracts later.
a gross interest rate
between pro-
given by a continuous distribution function
Since producers have no funds, each of
They can do
on the
units of the final
1
producer j also incurs a non-pecuniary cost
1
society.
The
cost of providing
where m'^ < a
A debt
start with a
—
1
represents
contract will specify
the lender has to repay. However, the producer can renege on
her payment promise. In this case, the lender can take the producer to court. The cost
of taking producer j to court,
i.e., filing
a complaint,
c^ +
where C^
is
degree of "legal formalism".
how
costly
example,
if
e,
a feature of the legal system that
imphes that enforcing debt contracts
it
will
be
is
more
The parameter
is
is
(1)
specific to debt contracts.
costly, wliich
may be
is
a
C^
liigh
which determines
malfeasance by the producer. For
the project turns out to be very complex (or difficult to monitor or adjudicate),
the producer
may
find
ways of not repaying vdthout the court
easily detecting this, e.g.,
diverting the proceeds wliile pretending to be bankrupt. If the lender
he incurs the cost in
(1)
files
a complaint,
and always wins and receives the promised payment, while the
producer incurs some positive cost
'^A central assumption here
is
e.
If
the lender does not
file
a complaint after the
that producers are distinct both from the ehte and from the lenders
(we do not need these groups to be disjoint, but simply to be sufficiently distinct).
is
higher
because there
9j is project complexity,
for the lender to prove that there is
A
reasonable given our focus on financial relations and growth in
This Eissumption
modern economies. Although there
have been societies such as the plantation economies of the Caribbean between 17th and 19th centuries
where the elites were also the producers, in most modern societies there are important producer groups
outside the elite. Moreover, in many societies expropriation by government is a major concern, and in this
case there is a natural distinction between producers and groups involved in expropriation. In addition,
the distinction between lenders and producers is a key element of any modern economy without this
distinction, a discussion of financial intermediation would not be meaningful.
—
producer reneges, there
We
project.
is
assume that
Finally, the ehte
no repayment and the producer receives the
6j is distributed
full
output of the
uniformly in the population between
can decide to expropriate the returns from the project.
and
1.
However,
they can only do so when the checks and balances that the society imposes on them are
We
sufficiently lax.
model
by assuming that "property rights institutions" constrain
tliis
the ehte in their expropriation.
More
the aggregate state of nature a
is
this formulation,
P
specifically, after
and expropriation
realized,
measures the degree of
investment decisions take place,
political checks
avoided
is
if
a < P. In
and balances on the
ehte. For
example, a stronger, more independent legislature (assuming this represents non-elites)
would correspond to a
liigh value of
the eUte expropriate producers.
P, meaning that only in special circumstances can
We
assume that the distribution of a
continuous distribution function, F(cr);
What
modelling exphcitly here.
to emphasize that
imposes on the
The timing
elite
tliis
represents political events that
tliis
given by a
we
are not
matters for the economic decisions of producers and
lenders will be the risk of expropriation
we want
is
by the
risk is in
elite,
and with
tliis
reduced-form modehng
tm:n related to pohtical constraints that society
and the government.
of events in this
economy
is
as follows:
1.
Producers observe their non-pecuniary cost of production, {cj}.
2.
Lenders compete to provide funds to producers.
3.
The aggregate
4.
Producers and lenders observe the reahzation of the project complexity, {9j}.
5.
If
state
a
is
reahzed, and the ehte take the expropriation decision.
there has been no expropriation, producers decide whether to renege on their
payments.
6.
Lenders decide whether to take producers
7.
Returns are reahzed and consrmied.
We
who have reneged
to court or not.
next characterize the subgame perfect equilibrium of this game in the standard
way by backward
induction. This equihbrimn will turn out to be imique.
Equilibrium with Only Debt Contracts
2.2
Let us start with a subgame where there has been no expropriation and producer
who has borrowed
Then
at the rate R, reneges.
the payoff from the strategy of fihng
a complaint for the lender, conditional on the realization of project complexity
V (file
= R — l — m'^ — 9j — C'',
\R,9j)
incurred the investment cost,
when he does not
but
legal costs,
file
1+
a complaint
will also
is
9j,
F (no
the legal costs
will incur
file
|
= —1 —
^j)
/?,
rri'^,
+ C^. The
Oj
payoff
as he wiU not incirr
not receive the payment R. Therefore, the lender wiU
file if
ej<R- C^.
when
Since reneging on the debt contract
no
benefits, the
producer
will
is:
since in this case he will get back R, he has already
and he
m*^,
j,
(2)
the lender
renege only
when
files
a complaint
does not hold.
(2)
assumption, the probability of repayment before the reaUzation of
is
costly
and creates
Given the miiform
9j is therefore
min(max(i?-C"',0),l),
where the
and
tween
<
that
max and min
1.
We
— C"^ <
i?
>
whenever a
are realized)
is
sure that the probability remains
assume tliroughout that
1
(see footnote 14).
C"^
>
(l
+
m'')
F {P)~ —
1,
Then, using the fact that the ehtes
boimded be-
which ensures
will
expropriate
P,^^ the expected return of a lender at the lending stage (before
a and
9j
is:
V (lend
where the
make
operators
first
\R)
= -l-m'^ + F{P){R-
C'^)R,
two terms are the costs of lending and monitoring, and the
tlaird
term
the probability that there will be no expropriation, F{P), times the probability that
there
no reneging, {R
is
lender will receive
cient funds
among
0.
—
C^), times the repayment amoimt, R.
Thus, we need
lenders to cover
V (lend
all
the
|
i?)
>
demand
0.
By
not lending, the
Moreover, since there are
for funds
suffi-
from producers, whenever
V (lend R) > 0, competition between lenders wiU reduce R, so in equiUbrium we must
have V (lend i?) = 0. Straightforward algebra shows that the miique positive solution
\
|
'^With a reasoning similar to that for the Laffer curve, for very high values of P the ruling elite
may want to reduce P in order to encourage greater investment and increase their
revenues. The simplifying assumption here is that they are unable to do so (see Acemoglu, 2003b, for
or the government
more
discussion).
to this equation
is:^^
R=
However,
for the
^
(3)
R<
producer to be able to repay, we also need
a, or
C^<C^F).a-(l±^4^^.
(4)
In other words, for the credit market not to collapse, the legal costs of enforcing contracts
need to be
less
than a
critical threshold.
Moreover,
C'^
(P)
is
increasing in P, so that
better property rights institutions increase the range of legal costs over which a credit
market can be supported.
It
dR/dC^ >
can also be verified that
institutions
and stronger constraints on
and dR/dC^ <
elites
thus better contracting
0,
reduce the required repayments (the interest
rate) in the credit market.
Now going to the first stage of the game, we can write the expected utihty of a producer
with
effort cost Ej as:
U,{e,\R)
= F{P)[a-{R-C')R]-e^,
which takes into accomit that with probabihty
ehte. Otherwise, the
producer receives the output
back to lenders depends on the reahzation of
< R—
0j
we
C'^i
\
so she will have to
make the
— F (P),
a,
9j.
there
is
expropriation by the
and whether she makes the payment
With
probability
R—
C^, we have
payinent. Using (3) to substitute out for R,
obtain:
Uj
{cj)
Notice an important feature of
on C^.
This
is
= F{P)a-l-m'^-
(5):
as long as (4)
Cj.
is satisfied,
(5)
Uj (cj) does not
depend
because lenders and producers write ex ante contracts, and they can
change the terais of these contracts to deal with the fact that there
is
a low probabihty
R—
C^ >
is always true.
Straightforward algebra using (3) establishes that as long
C^ > (l + to'*) F{P)~^ — 1, we also have i? — C* < 1, as claimed in the text. Alternatively, if
C* < (1 + m'^) F {P)~^ - 1, then the probabihty that 6j < R - C^ is equal to 1, and as a result,
R = {1 + to'') F(P)"\ and the credit market collapses only if (l + m'') F (Py^ > a. Thus, if C* <
^"•Note that
as
(l
a
a
+ m'') F {P)~ — 1, the interest rate is R — (1 + to'')F(P)~ (as long
- (1 + m'^)F{Py'^ /a > C' > {1 + m'^) F {Py'^ - 1, the interest rate is
— (l + to'') F {P)~ /a, the credit market collapses.
10
as this
is less
than
given by (3), and
if
a);
if
C^ >
of repayment
when C^
high. In other words,
is
R
adjusts to keep the expected payments
from the producer to the lender constant irrespective of the value of C^. Therefore, when
C^
is liigh,
the producer
more
likely to
be able to avoid payments,
have to promise to pay a liigher interest
will
To
so
when
calculate total investment
not collapse, notice that
0,
is
we need
Uj
distribution of Cj
for
is
given by
G (e),
|
i?)
all
investment
is
(4) is satisfied, i.e.,
when
the credit market does
Thus using the
producer j to invest.
total investment
financially intermediated, this
diation) in the economy. This expression
and
rate.^^
is
fact that the
given by:
= G[F{P)a-l-7n%
I
Since
she
the producer does not midertake the investment, she receives
if
>
(e^
l^ut in retirrn,
credit are independent of C^.
is
(6)
also total credit (finaiicial interme-
shows that, as long as
(4) is satisfied,
Contracting institutions therefore
investment
may have
limited
effects
on investment, because ex ante contracting enables the parties to circumvent po-
tential
enforcement problems. However, there are limits to this argument:
contract enforcement, C^,
is
very
if
the cost of
the credit market will collapse and there will be
liigh,
no investment.
when
Notice also that
(4)
pohtical constraints on ehtes,
have a "more important"
is
holds, investment
dl /dP >
i.e.,
effect
is
always increasing in the degree of
The reason why property rights institutions
0.
on investment than contracting institutions in
this
model
between lenders and producers, there are no ex ante
that, in contrast to contracts
contracts between producers (or lenders) and the elite that can be used to circumvent the
ex post holdup and expropriation problem. Here we take
possibilities are absent,
but
it is
clear
why
tliis
it
would be
as given that such contracting
so:
it is
impossible to write
credible contracts with the state to prevent future expropriation, since the state, with its
monopoly
We
of legitimate violence,
can now summarize
'''The fact that these
two
tliis
is
the ultimate arbiter of contracts.^''
discussion as follows:
effects exactly cancel
never go to court along the equilibrium path.
If
in this case,
is
a special feature of this model, where parties
R would
have to increase further to compensate
C^ would have an
effect on Uj {cj). Nevertheless, it
ex ante contracting possibilities would reduce the effect of C^ on
lenders for the expected court costs as well, and
can be verified that even
out
they did,
investment.
"'One way of "writing" such contracts
through trigger strategies in a repeated game, whereby if
Acemoglu (2003a,b) shows that there are
generally limits to how useful these trigger strategies will be in a political context.
is
the state expropriates too much, agents will stop investing.
11
Result 1 In the model outlined above with only debt
C^ <
for legal costs C"' (P) such that if
on equilibrium investment.
and investment
falls
If
C^
&
rises
Qd ^ Qd
^p-j^
g^
higher
Figiu-e 1 is a simple
{P), changes in legal costs have no effect
above C^{P), the credit market collapses
to zero. Greater constraint
the likeUhood of credit market collapse,
P
contracts, there exists a threshold
i.e.,
on
expropriation, P, reduces
increases C'^ (P). Moreover, as long as
raises investment.
diagrammatic representation of the equilibrium, with the
costs of debt contract enforcement,
i.e.,
C* on the
legal formalism,
on eUte expropriation, P, on the horizontal
constraint
elite
vertical axis
and
Above the hne &{P), the
axis.
market collapses because the costs of contract enforcement are too high. In
credit
legal
this
P does not affect investment, since investment is already 0. Below
line the credit market exists and a liigher value of P raises investment directly.
region a higher value of
the
C''-
(P)
In this region, private contracting undoes the effects of higher legal costs, so
effect
on investment.
to cross
2.3
A
greater
C^ reduces investment only when
from above to below the threshold hne
C^ has no
induces the economy
it
C"^ (P).
Equity Contracts
To introduce equity
we assume that
contracts in the simplest possible way,
in stage 2 of
the above timing of events, lenders can decide between a debt contract as described above,
or
an equity contract where they
returns.
With
will lend 1 unit in return for
equity contracts, raising
impUes that, everything
1
unit of funds costs
1
a fraction s of the project
+ m^,
else equal, equity finance is cheaper, for
where
The
different
makes better use
costs of court action
from the
of market information (e.g.,
when the producer
<
vn!^.
This
example because money
can be raised from a broader group of savers, or because equity finance
less costly or
rrf
is
administratively
Holmstrom and
Tirole, 1993).
reneges on her equity payments are
legal costs involved in enforcing debt contracts,
and are equal to C^
>
C^, so that setthng disputes related to equity are more costly. This might be, for example,
because when the producer
fails
to repay debt, the lender
her assets. In contrast, shareholders do not have access to
may be
tliis
able to foreclose on
option
when
the producer
does not pay dividends, making the enforcement of equity contracts more costly for lenders
(see, e.g.,
The
Hart, 1995).
analysis in the pure equity case
is
parallel to the debt case,
12
and we can
easily see
when the producer reneges on
that
6j
<
and
sa
—
C^.
The equiUbrium
naturally,
we need
market to function,
=
s
<
a complaint only
file
^
P)
2a
wliich gives a condition similar to before for the credit
1,
i.e.,
C < C (P)
Once
Uj
again, as long as this condition
(ej)
= F {P)a —
1
—
—
Tjf
Cj,
(8)
is satisfied,
we have the
utility of
and consequently, aggregate investment
producer j as
is
I^G[F{P)a-l-m^],
which, Hke
(6),
Result 2 In the model outlined above with only equity
for legal costs C"^
(P) such that
on equilibrium investment.
(i.e.,
(9)
does not depend on legal rules C^, as long as
investment
falls
increases
If
if
C^
to zero. Greater
C^ (P)), and
C^ < C^ (P), changes
rises
P
above
(8) holds. Tliis gives us:
contracts, there exists a threshold
in legal costs have
no
effect
(P), the equity market collapses
C"^
and
reduces the likeUhood of equity market coUapse
as long as
C^ <
C"^
(P),
it
straightforward to characterize the equihbrimn
It is also
if:
equity share given to lenders will be:
—
^
the payment, the lender wiU
raises investment.
when both debt and
equity
contracts are available. In this case, competition between lenders ensiues that the contract
form maximizing the
utilities of
utility of
producers
producers with debt and equity contracts. As long as
credit markets will function
wiU prevail as long as
m*^
<
when
(4) holds,
contracts even
Result 3
If
if
m^ <
both
contracts
(4)
but
m'',
i.e.,
as long as equity
may be
is
the more
and
when m^ <
and
(8) are satisfied,
We
summarize
form of financial
the equilibrium will featiue debt
this discussion as follows:
(8) are satisfied,
m'^. If (4)
efficient
greater than C^, an interesting configiuation
(8) fails to hold. In this case,
m'^.
(4)
both with debt and equity contracts, and equity contracts
intermediation. However, since C^
arises
Thus, we need to calculate the
will prevail.
the unique equifibrimu involves only eqvuty
holds and (8)
involves only debt contracts.
13
fails
to hold, the unique equiUbrimn
Now
in light of these results, let us
compare two economies that have the same P, but
one has a higher legal cost of enforcing both debt and equity contracts, corresponding to
high values of
C and
C"^,
and the other has low values of C^ and C^.
enforcement-cost economy, but not in the high-cost one, and
will
if (4)
If (8)
holds in the low-
holds in both, then we
observe debt contracts in the high-cost economy and equity contracts in the low-cost
economy. Despite this sharp difference in the form of financial intermediation, differences
in total credit
and investment may be
in the high-cost
differ
a potential interpretation
for
wiU
total investment
G [F (P) a — 1 —
economy and
investment levels wiU not
rules
small:
much
in the
rrf] in
is
G
[F (F) a
the low-cost one.
—
1
If rrf
— m^]
«
m'^,
two economies. This configuration provides
our empirical results where economies with different legal
exliibit large differences in
the form of financial intermediation, particularly the
use of equity, but only small differences in levels of long-run income, investment, and
total credit (debt plus equity).
Therefore, in this model, legal costs of private contract
enforcement can influence the form of financial intermediation at the same time as having
a relatively small
effect
on investment and output. In contrast, the
by the state and pohtical ehtes typically has a major
effect
risk of expropriation
on investment output.
Empirical Strategy and Data
3
Basic Specification
3.1
We
are interested in investigating the separate effects of contracting institutions
Ignoring nonhnearities, the economic relationship
property rights institutions.
we
and
are
interested in identifying can be written as:
Fc
where Y^
is
=«
•
F,
+ /?
•
7e -F
the outcome of interest for coimtry
Z^ 7o + e,
c,
for
example, per capita income, the
investment rate, or the level of financial development. Fc
which captures the
institutions,
7o
is
and Zc
is
a measure of legal formahsm,
legal costs of contract enforcement, Ic is a
is
a set of other controls,
a and
j3
(10)
measure of property rights
are the parameters of interest, and
a vector capturing effects of the control variables in Zc-^^
^^In addition,
we have
also investigated
whether there
is
contracting institutions by adding interaction terms such
an interaction between property rights and
and whether there are significant
jFc
We did not find any evidence for significant
£is
-'^ci
by adding higher-order terms in Fc and Icinteractions or nonlinearities, so we do not report these results to save space.
nonlinearities
14
The
four outcomes
we focus on
GDP
the level of
are:
per capita, wliich
is
a good
measure of long-rmi growth since around 1750 there were only ininor differences
come per capita
GDP,
investment to
money
as a
across comitries (Acemoglu, Johnson,
wliich
and Robinson, 2002); the
the best measure of whether a society
is
into productive investments; the
amoimt
ratio of
able to chamiel
is
of private credit as a percent of
measure of finance provided tlirough the banking sector and trade
in in-
credit;
GDP,
and stock
market capitalization as a percent of GDP, which provides a measure of equity finance.
In our baseline regressions,
we choose outcomes from
by data availabihty and our desire to
start the analysis
have institutions data are aU independent
For
Ic
—
when the
tliis
choice
is
dictated
comitries for wliich
we
states.
we use two measures. Our base measure
by government, averaged over 1985-95, from
first
the 1990s
"protection against expropriation"
is
Political Risk Services.
These data were
used in economics by Knack and Keefer (1995), and are also the main measure
used in Acemoglu, Johnson, and Robuison (2001). Pohtical Risk Services reports a value
between
and 10
each comitry and year, with
for
The second measure
expropriation.
is
indicating the lowest protection against
"constraint on the executive" from the Pohty
dataset, capturing the degree of constraints on pohticians
(Giirr, 1997).^*'
Tliis
constraints. In our
measure ranges from
main
regressions,
1
to
7,
IV
and pohtically powerful ehtes
where a higher score indicates greater
we use the average
of the values between 1990
and
2000 inclusive.^^
As already
noted,
we proxy
for contracting institutions
ism, Fc, using measures constructed
(2003).
3.2
The
The
with the degree of legal formal-
by Djankov, La Porta, Lopez-de-Silanes, and
Slileifer
details of these variables are discussed in Section 3.4 below.
Empirical Strategy
simplest strategy
is
to estimate the
model
in equation (10) using ordinary least
squares (OLS) regression. There are two distinct problems with this strategy. First, both
contractmg and property rights institutions are endogenous, so we
verse causahty, or the effect of
some omitted
may be
^'^The latest version of Polity
is
IV
is
available
ignore that year for the purposes of constructing the average.
on the executive
may be a down-
on the web at http://www.cidcm.umd.edu/inscr/polity/
missing or the coding indicates an interregnum of some kind
results using constraint
re-
characteristics (e.g., geography, reUgion, or
other variables). Second, both variables are measured with error, so there
^^Where a year
capturing
in 1990, in 1970,
15
and
We
its
(e.g., civil
war),
we
also checked the robustness of our
average value in 1950, 1960, and 1970.
ward attenuation
More important,
bias.
if
contracting and property rights institutions
are correlated, the effect of the institution that
on to the other
respond to the causal
regressions will give results that
—upward or dovimward bias
is
cor-
So we would Uke to estimate equation
possible.
Two-Stage Least Squares (2SLS) with
formahsm and property
do not
contracting and property rights institutions on economic
effect of
outcomes
legal
will load
variable.
Both of these concerns imply that OLS
(10) using
measured with greater error
is
rights.
distinct
and plausible instruments
for
These instruments should be correlated with the
endogenous regressors but orthogonal to any other omitted characteristics
(i.e.,
uncorre-
lated with the outcomes of interest through any chaimel other than their effect via the
endogenous regressors). ^°
In this paper,
two
we pursue a multiple IV strategy
The
to identify the effects of interest.
first-stages are:
where
Mc
Fc
=
(5i-Lc
+
Ic
=
62- Lc
+ r}2- Mc + Zl,-'y2 + U2c
77i-Mc
+
Z;-7i
either the log potential mortality rate of
is
+ iiie
Eiuopean
(11)
settlers or log of the
indigenous population density in 1500, and conceptually corresponds to the instrument
for
property rights institutions.
dummy
We
explain these measures in Section 3.3 below. Lc
for English legal origin (or equivalently,
colony) and
is
is
whether or not the comitry was a British
the instrmnent for legal formahsm
(i.e.,
contracting institutions). This
discussed further in Section 3.4. If these instrmuents are vahd, the
IV strategy wiU
f3
is
solve
the endogeneity, the omitted variables bias, and the measiurement error problems, and
can estimate the a and
a
we
parameters consistently.
is that legal origin may affect economic outcomes through channels other than
example, La Porta et al., 1998, Glaeser and Shleifer, 2002, and Mahoney, 2001).
In terms of our framework, in particular, equations (10) and (11), this would amount to Cov {Sc, Lc) 5^ 0,
^"A potential concern
legal
formalism
(see, for
whereas the 2SLS identifying assumption is that this covariance should be 0. Since the existing literature
suggests that English legal origin should have a positive effect on the economic outcomes studied here,
we expect that, if anything, Cov{ec,Lc) > 0, and in this case, the estimate of the impact of legal
formalism on economic outcomes, a, will be biased upwards, and our results can be interpreted as
potential upper bounds on the importance of legal formalism and contracting institutions. The results
reported in Appendix Table A3 do not show any evidence of a major effect of legal origin on the outcome
variables here.
16
Our
and Population Density
Settler Mortality
3.3
first
instriiment for property rights institutions
is
settler mortality in coimtries that
were colonized by European nations between 1500 and 1900.^^ Acemoglu, Johnson, and
Robinson (2001) docmnented that European colonization strategies had radically
different
impUcations for economic development. Places prospered when Europeans set up institutions that protected private property rights
and powerful
established
elites.
first
—or took over existing—extractive
on
politicians
when Europeans
institutions.
the Europeans' colonization strategy? There were two key factors.
was the disease environment facing Europeans. Wliere the disease environment
was favorable
political
effective constraints
In contrast, areas stagnated or grew only slowly
What determined
The
and placed
Eirropean settlements, they migrated in large mmibers and developed
for
and economic
institutions very similar to, or even substantially better than, the
contemporary mstitutions in Europe. These
Canada, Austraha, or
New
settler colonies,
such as the United States,
Zealand, rapidly developed and maintained good institutions,
with tight constraints on pohticians and
elites,
and secure property
rights.
In
many
other colonies, for example in sub-Saharan Africa, South Asia, and Central America,
Europeans faced
in
some
liigh or
very liigh mortality rates (up to 50 percent mortality per year
and settlement was not
places)
much more hkely
feasible.
In these areas, the colonizers were
to develop extractive institutions, used mostly to exploit the native
population for the benefit of European colonizers. After independence the beneficiaries
of extraction changed,
that
had rapacious
today.
Based on
an instrmnent
more
and the form of extraction has evolved over time, but countries
rule mider colonialism typically have worse property rights institutions
tliis
reasoning,
we
will
use potential European settler mortahty rates as
for current institutions (see
discussion).
Acemoglu, Johnson, and Robinson, 2001,
for
^^
The second determinant
of
Em-opean colonization strategy was
initial
indigenous pop-
^'We use the series constructed by Acemoglu, Johnson, and Robinson (2001) based primarily on Curtin
(1989, 1998) and Gutierrez (1986).
^^ Malaria and yellow fever caused the majority of European deaths during the early colonization
period. Although these diseeises were fatal to Europeans, they had much less effect on indigenous adults
with aquired or inherited immunity. These diseases are therefore unlikely to be the reason why many
countries in Africa and Asia are poor today. More generally, when we measure the effect of institutions
correctly,
there
is
no evidence that the large income differences between former colonies are due to
geography, religion, or culture (for more details of this analysis, see Acemoglu, Johnson and Robinson,
2001, 2002).
These
results are robust to alternative
variables (Acemoglu, Johnson
measures of outcomes, institutions, and control
and Robinson, 2001, and Easterly and Levine, 2003).
17
Illation density.
Where
population and put
it
this
to
was high, Europeans were more
work
in
some form
there
is
and
pop-
less likely
Acemoglu, Johnson,
did not settle.
that, for coimtries colonized
initial
by European powers,
a strong negative relationship between population density in 1500 and income
per capita today. Tliis relationship
is
population density in 1500 had, and
due to the
fact that
former colonies with greater
have, worse property rights institutions.
still
density of indigenous population per square kilometer in 1500
alternative instrmnent. Because settler mortality
but should have similar
effects
on property
is
in 1500 capture
between the two measures
rights, using these
The
therefore an appeahng
and population density
different sources of variation in practice (the correlation
is
Wliere
likely settle themselves,
when they
to develop extractive institutions even
and Robinson (2002) provide evidence
of forced labor system.
more
ulation density was low, Europeans were
likely to "capture" the local
is 0.4),
two instruments separately
a good check on our results.
Legal Origin and Legal Formalism
3.4
The fundamental
idea in the Une of research of
Vishny (1997, 1998)
legal,
is
La
that countries have distinct "legal origins" and these matter for
economic, and financial outcomes.^"^
La Porta
distinction between the two great legal traditions:
part of the
Porta, Lopez-de-Silanes, Shleifer, and
UK or the British Empire, and
"Civil
(1998)
draw the strongest
"Common Law"
countries that were
et al.
Law" countries where a French, German,
or Scandinavian legal system has prevailed.
Djankov, La Porta, Lopez-de-Silanes, and Shleifer (2003)
offer
two measures
for the
operation of contract enforcement through the legal system. These quantify the "formal"
procedures associated with collecting on a boimced check and evicting a tenant for non-
payment
of rent. In both cases, the defendant has no justification
payment. The underlying idea
is
and avoids volvmtary
that a pure "neighbors" model, in which disputes are
resolved informally by disinterested local third parties based on fairness criteria, would
quickly rule in favor of the plaintiff (see Shapiro, 1981, and also EUickson, 1991, for
real
commimity works under such a model) More
.
legal
how a
formalism creates additional costs
of enforcing the contract implied by the check or the tenancy agreement. Djankov et
—
(2003) measure the extent of these costs
23
legal
—by surveying expert opinions
formahsm
See Glaeser and Shleifer (2002) on the origins of these distinct "legal famiUes".
18
al.
of lawyers in an international network of law firms in 109 countries.
They then construct
indices that are comparable across comitries.
A
legal
system
more formal,
is
in their metric,
if it
involves professional judges
lawyers, written rather than oral argtmients, the legal justification of claims
decisions, the regulation of evidence, superior review of first-instance
and creates delay
formahsm
of the
Djankov
collected legal formalism data on
more
it
gives 9 or 10
Whether a country has a common law or
civil
al.
good reasons to regard
this as
law systems on the country they colonized,
law systems.
civil
We
Enghsh
legal origin
law system
other Eiiropean powers and
exogenous
an important determinant
may be a choice, but
for
former
—the British imposed common
As we wiU
by other European
formahsm with
legal origin
see in greater detail below,
formahsm than those that were colonized by
less
now have some
version of civil law.
The Samples and Descriptive
Statistics
Samples
4.1
Our
is
therefore instrument legal
have
former
also confirm all our results
wliile countries colonized
sample of former European colonies. ^^
for
We
(2003).
of legal formahsm. In general, the legal origin of a country
colonies there are
Bank subsequently
more observations
We
data.^^
using the eviction measure directly from Djankov et
4
(2003)
countries, but only for the "check" measure.
we have aU the other necessary
colonies for which
colonies with
al.
raises the cost of adjudication
(2003) study, the World
et al.
use this measure in our base regressions, as
in the
et
in the resolution of disputes.
As an extension
powers have
and judges'
judgment, other
"engagement formalities", and more required independent actions. Djankov
also present evidence that a greater degree of legal
and
basic sample
is
that of former
European
colonies.
For aU these comitries we have
information on their legal origin and an estimate of their population density in 1500 (from
Acemoglu
et
al.,
2002).
From smaUer subsets
measures of institutions,
and
for
measures of
legal
for potential settler
of countries,
we
also
have data
mortahty rates (from Acemoglu
formahsm (from Djankov
et
al.,
for various
et al., 2001)
2003).
^''The extended check measure data were kindly provided by Simeon
Djankov
in
a private communica-
tion.
^^Djankov et
al
(2003) relate legal formalism to legal origin in the whole world sample and show that
legal origin explains
about 40 percent of the variation
19
in legal formalism.
common
In total, there are 42
Djankov
et
al.
law "English legal origin" countries in the extended
(2003) sample, of which almost
base sample, we have 30 EngUsh legal origin
when we
all
1
In our
lose additional observations
civil
law "French
legal origin"
(2003) sample, of wliich 35 are former
al.
summarizes our data. Column
we have
countries on which
standard deviation or
all
European
less) of
down into former
data.
1
reports
Colmnn
mean
shows
2
values
oiu*
and standard deviations
for
data for the former colonies of
cases, the values for former colonies are quite close (within half a
former British colonies
these
and we
colonies.^''
^^
Eiuopean powers. In
for
coxintries,
European
Descriptive Statistics
4.2
Table
are former
use the settler mortality instrument. There are 47
countries in the extended Djarrkov et
colonies.
all
the values for
(i.e.,
common
all
countries.
Column
3 reports
mean
values
law countries), and columns 4 through 6 break
British colonies with low,
medium, and high settler mortahty (with
the break points given by values that divide aU excolonies roughly into thirds). Colimms
7 through 10 provide parallel data for former colonies with French legal origin.
The
first
two rows
in
Table
1
report our measures of property rights institutions:
protection against expropriation and constraint on the executive.
Rows
3
and 4 report
the two measures of legal formahsm: the "check measiire" and the "eviction measure"
Former colonies with lower
on average, better property
Rows
GDP
5, 6, 7,
settler
mortahty and those with an Enghsh
rights institutions
and lower
and 8 describe our four main dependent
per capita (in
PPP
terms) in 1995.^*
legal origin have,
legal formalism.
variables.
Row
5 reports log of
We can see a clear relationship between settler
^^The exceptions are: Britain and Ireland in Europe; Thailand, which was never colonized; and IsBahrain, and the United Arab Emirates, which were formerly part of the Ottoman Empire and
administered by Britain under League of Nations mandates after the end of World War I.
We do not treat former League of Nations mandate countries as excolonies for three reasons. First,
European control was relatively short-lived and did not generally have major transformative effects on
political institutions. Second, because these mandates were granted in the twentieth centiuy, European
powers were already moving towards decolonization or at least minimal control, rather than the previous
forms of colonial control for either settlement or extraction. Third, by the early twentieth century,
advances in medicine meant that settler mortality was much more even across countries, so our data
on this from earlier centuries do not allow construction of a valid instrument for the League of Nations
rael,
mandate
countries.
^^The exceptions, in addition to France, are Belgium, Greece, Italy, Luxembourg, Malta, the Netherlands, Portugal, and Spain in Europe, and Jordan, Kuwait, and Turkey in the former Ottoman Empire.
^^These data are from the World Bank (2003). The results are robust to using GDP per capita data
from other years or from the Summers-Heston data set.
20
mortality and income per capita: former colonies with higher settler mortality rates have
substantially lower income per capita today. In addition, a comparison of colmnns 3
and
7 shows that English legal origin colonies have liigher average income per capita than
French legal origin colonies.
Row 6
prices
reports om* data on the ratio of private investment to
and averaged over the 1990s (from Heston
in former colonies
amount
shown
in
row
Investment ratios are higher
et al. 2002).
we use two standard measures
of credit to the private sector in the
7;
in current
with lower settler mortahty rates, and liigher in former British colonies.
In our basehne regressions
total
GDP, measured
and stock market
capitalization,
economy
shown
in
of financial development: the
as a percent of
row
S.'^^
GDP
in 1998,
Former colonies with
lower settler mortality rates and an English legal origin have, on average, liigher levels of
credit to the private sector.
For the size of the stock market, we use average stock market capitaUzation as a
percent of
GDP, provided by Beck
et al.
(2003a) ."'°
much
mortality rates and Enghsh legal origin have
Below we
official
will also look at the barriers to entry for
The
and
first is
second measure
Shleifer (2002).
the
is
number
businesses, particularly the
La Porta, Lopezin Table
of formal procedures needed to register a business.
GDP
on potential entrepreneurs.
settler
new
There are two main measures (rows 9 and 10
the cost of registration. Tliis
as a percentage of annual
settler
higher stock market capitaUzations.
regulations required for registration as measured by Djankov,
de-Silanes,
1).
Former colonies with lower
per capita.
A
is
calculated by Djarikov et
higher cost
is
al.
The
(2002)
obviously a greater burden
French legal origin former colonies and those with higher
mortahty rates have more procedures required
the overall cost of registering a business
is
for registering
higher as a percent of
a new business and
GDP
per capita.
^^Our base measure for banking system development is credit to the private sector, from the World
(2003). This measure refers to financial resources provided to the private sector, such as through
loans, purchases of nonequity securities, and trade credits and other accounts receivable, that establish a
Bank
claim for repayment. For some countries these claims include credit to public enterprises. In the choice
and other mesisures, we are following the financial development literature; see, for example, Levine
and King (1993), Rajan and Zingales (1998), and Levine (2003).
•*"This measure corresponds to the total value of outstanding shares as a percent of GDP. The series
averaged over 1990-95, which is appealing since it excludes the large run-up in global stock markets in
of this
(1997), Levine
is
the late 1990s (as well as the large, but mostly temporary, effects of the Asian financial
21
crisis).
Results
5
First-Stage Results
5.1
Our
regression analysis disentangles the effects of legal origin acting through legal formal-
and colonization strategy acting through property
ism,
showing the
Figure
rights institutions.
We
start
by
first-stage relationships in Figures 2 tlirough 4.
upper
2,
left
corner, plots
on the y-axis the residuals from regressing average
protection against expropriation on Enghsh legal origm, against on the x-axis the residuals
from regressing log
settler mortality
on English
legal origin. This
is
a visual representation
of the strong first-stage relationship between the settler mortahty instrument
rights institutions today.
The upper
right corner of Figure 2
out the effects of log settler mortahty, there
is
shows that,
after partialing
a substantially weaker but stiU positive
between protection against expropriation and English
relationsliip
and property
legal origin.
As our
regression analysis below will illustrate, however, the relationship between protection
against expropriation
Figure
this
on log
legal origin
is
generally not robust.
lower right, plots the residuals from regressing the check measure of legal
2,
formahsm on
origin
and Enghsh
Enghsh
log settler mortahty, agauist the residuals from regressing
settler
mortahty. This shows that there
measure of contracting institutions and
is
also a strong relationship
Figure
legal origin.
2,
lower
left,
legal
between
depicts a
weaker (and statisticaUy insignificant) relationship between the check measure of legal
formahsm and
log settler mortahty.
Figure 3 shows a similar pattern using constraint on the executive and the eviction
measure of legal formahsm as the dependent
more
variables. In this case the first stages are even
separable: log settler mortahty has a strong effect
institutions
and no
effect
on
this
on
measure of contracting
this
measure of property rights
institutions, while
Enghsh
legal
origin here affects contracting institutions but not property rights institutions. Figiire 4
presents the first-stage results for protection against expropriation
and the check measxire
of legal formalism with log population density in 1500 as the instrmnent for property
rights institutions; these
5.2
show a
2.
Univariate Regressions
To provide a benchmark. Table
hand
similar pattern to that in Figure
side variable.
In Panel
A
2 reports results just using legal
the dependent variable
22
is
log
formahsm
GDP
as the right-
per capita in 1995.
Columns
Column
and 2 report OLS regressions using the check measure of
1
uses data from
1
109 comitries for wliich we have
all
measure of legal formaUsm; column 2 Umits
by European powers and
There
OLS
for
GDP
legal formalism.
data and the check
to just the 65 countries that were colonized
tliis
which we have data on
formahsm.
legal
a significant coefficient on the check measure of legal formahsm in the basic
is
regression
—a one standard deviation increase
over a 30 percent dechne in
malism with
GDP
legal origin, there
is
per capita today.
a strong
associated with
is
Wlien we instrument
for legal for-
stage (R^=0.58), but in the second stage
fii'st
the coefficient becomes msignificant, though
formaUsm
in legal
remains quantitatively large; the point
it
estimate of -0.18 in colmnn 3 implies that a one standard deviation increase in legal
mahsm
5,
and
will
GDP
reduce log
per capita by 0.20 of a standard deviation. '^^ In colmnns
the eviction measure of legal
6,
specifications,
and the
2,
the
first
In Panel B, the dependent variable
is
columns
a significant negative
and
1
level (but
2.
formahsm
size of the effect is
the IV specifications of Table
There
The
is
coefficient
is
not significant in either
OLS
about 1/4 of that imphed by colmnn
stage R^
is
in the
3.
4,
or
IV
In
all
range 0.56-0.6L"^^
the average investment- GDP ratio in the 1990s.
on
formahsm
legal
column 3
coefficient of -1.77 in
is
in the
OLS
specifications of
significant at the 10 percent
not at 5 percent) and imphes that a one standard deviation increase in legal
formaUsm would reduce the investment-GDP
columns
for-
4,
smaU. The
5,
and
6,
ratio
by
0.3 of a standard deviation.
the eviction measure of legal formaUsm
size of the effect implied
the effect suggested by colmnn
3.
by the IV
Since the
first
coefficient in
is
both
insignificant
column 6
is
In
and
about 1/2 of
stages in this and subsequent panels are
almost identical to those in Panel A, we do not report them to save space.
Panels
C
C and D show significant
the dependent variable
coefficient is -0.14 in
it
is
results for
both measures of legal formaUsm. In Panel
credit to the private sector as a percent of
colmnn 2 (OLS) and -0.13
in
column 3
implies that a one standard deviation increase in legal
standard deviation faU in the credit to
one standard deviation change
GDP
ratio.
The
GDP m
(IV). Tliis is
1998.
a large
effect
formaUsm causes about a
results for the eviction
The
half
measure
measure of legal formalism in the former colonies
change of 0.22, which is about 20 percent of the standard
deviation of log GDP, which is approximately 1 for former colonies.
^^The difference between the results using the check and the eviction measures is not due to differences
in the samples. When we run regressions with the check measure restricting the sample only to those
countries that have data on the eviction measure, we get very similar results to those using the full check
measure sample.
•^'A
sample
is
in the check
1.24, thus the estimate implies a
23
and 6 of Panel B, are similar (though
of legal formalism, in coliumis 4, 5,
slightly less
significant).
Panel
D
a percent of
reports the
GDP
same
set of specifications
now with
stock market capitaUzation as
(averaged over 1990-95) as the dependent variable. Both legal formahsm
measures are significant determinants of stock market capitalization, and the
measure (columns 2 and
results are quite similar for the check
is
about twice the
A
6).
OLS
size of the
3)
coefficient for the eviction
,
OLS and IV
while the IV coefficient
measvue (columns
5
and
one standard deviation increase in either legal formahsm measure imphes a half
standard deviation dechne in stock market capitahzation.
Table 3 reports parallel univariate specifications using our measures for property rights
and constraint on the executive, as the
institutions, protection against expropriation
dependent variables, and with
the instrimients.
In
if
example
columns
TMs
mortahty and log population density
we only
panels of Table 3
we have data on both
regressions
in
all
settler
2, 3,
and
4, is
instriunents
in
in-
1500 as
include a country in the excolonies
—
this ensures that the
sample
size, for
the same, so the coefficients are directly comparable.
and
restriction does not affect the results,
in subsequent tables,
when we use
log
population density as instrument, we will report results with the fuU set of coimtries for
which we have data on that instrmnent.
Panel
A shows
a strong
first
stage from log settler mortality to property rights insti-
an R^ of 0.23 in column
tutions, with
specifications, so to save space
The
3.
we do not repeat them
the IV coefficient using log settler mortahty
This
is
similar to the results in
that the
is
OLS
almost identical in aU
in the other panels. In
approximately double the
is
OLS
aU panels
coefficient.
Acemoglu, Johnson, and Robinson (2001), and suggests
estimates are significantly biased downwards because of attenuation. This
not surprising: since the available measmes of property rights institutions correspond
quite poorly to the concepts
ror, creating
tliis
we would
downward attenuation
like to
measme, there
The
bias.
is
a form of
measmement
er-
instrimiental variables strategy corrects for
type of attenuation bias. The first-stage relationship between log population density
in 1500
4.
first-stage results are
and protection against expropriation
For this instrmnent, the IV coefficient
a bit weaker, with an R^ of 0.17 in column
also typically twice the
is
Property rights institutions have a large
ification of
is
effect
OLS
coefficient.
on income per capita. In the IV spec-
Panel A, the coefficients of 1.05 and 1.07 in colmnns 3 and 4 imply that a
one standard deviation improvement in
this
measiue of institutions leads to about a
24
1.5
standard deviation increase in
cohimn
executive, in
Property
ratio,
The estimated
per capita.
effect of constraint
on the
7, is similar.
riglits also
GDP
credit to
GDP
have a large
effect
on the investment to
and on stock market development.
GDP ratio,
on the private
For example, in colimui 3 of
Panel B, the coefficient of 5.5 impUes that a one standard deviation improvement in
property rights causes a 1.1 standard deviation increase in the investment-GDP ratio.
The
estimates in colmnn 3 of Panels
improvement
GDP
credit to
The
in property rights
ratio
and a
1.2
results using constraint
C and
D, imply that a one standard deviation
would cause a
1.5
standard deviation increase in stock market capitalization.
on the executive are qualitatively and quantitatively
Taken together. Tables 2 and 3 show strong
on
GDP
standard deviation increase in the
effects of
legal formalism)
6
of contracting institutions (proxied
on credit and stock market development, with more limited
GDP per capita and the investment-GDP
results
property rights institutions
per capita, investment, credit, and stock market development both in univariate
OLS and IV regressions. They also show strong effects
by
sunilar.
ratio.
We
next
tiurn to investigating
effects
how
on
these
change when the two sets of variables are included simultaneously.
Contracting vs. Property Rights Institutions
6.1
Main Results
Tables
4,
5,
6
and 7 report our main
results.
In aU fovu tables, colmuns
1
tlirough 4
use protection against expropriation as the measiue of property rights institutions and
columns 5 through 8 use constraint on the executive. Columns
measiue of
legal formalism,
measure of
legal
and columns
3, 4, 7,
1, 2, 5,
and 8 include
and 6 use the check
results with the eviction
formaUsm. For each specification we present a pair of
odd-numbered colimms and IV
in
even-numbered columns.
results:
OLS
in
For the IV specifications,
the top panel reports the second stage and the other panels report the
first
stages for
the measure of property rights institutions and the measiue of legal formahsm in that
order. All four tables use log settler mortality rates as the instrument for property rights
institutions,
and Tables A4, A5, A6 and A7
in the
Appendix have an
identical structure,
but use log population density in 1500 as the instrument. ^'^
^^In addition, Appendix Table A2 reports regressions in which the dependent variable is economic
growth between 1970 and 1995. The results are similar to Table 4, where log GDP per capita is the
25
The
first-stage regressions in all eight tables are quite similar
patterns shown in Figures 2 tluough
using either measiue, there
is
between -0.65 and
-0.92,
legal origin is positive
and
is
4.
In the
first
and consistent with the
stage for property rights institutions,
a strong robust effect of log settler mortality
and
—the
coefficient
typically four times larger than the standard error. English
significant in the specification of coliimn 2,
but in colunm 4
it
When we
use
constraint on the executive as the measure of property rights institutions (columns 6
and
is
significant only
8),
in
when we
use log population density as the instrument.
the sign on English legal origin
is
insignificant
and usually
negative. Overall, the
which coimtries were colonized, but not who colonized them,
is
way
a robust determinant
of property rights institutions.
In the
first
legal origin
Enghsh
stage for legal formalism, using either the check or eviction measure,
has a strong robust negative
effect.
In contrast, log settler mortahty and log
population density in 1500 are not significant in any specification. Wlio colonized, but
not the
way
in
which countries were colonized, appears to
affect the extent of
formahsm
in legal procedures.
These strong
first-stage results enable us to disentangle the effect of property rights
and contracting
institutions. In
expropriation
0.95.
rights
is
wiU lead to a
results in
column 2 of Table
4,
the coefficient on protection against
This impUes that a one standard deviation improvement in property
1.4
standard deviation increase in
per capita.
column 6 imply that a one standard deviation increase
executive causes a two standard deviation increase in
on
coefficient
legal
columns 2 and
higher
GDP
GDP
4, it
formalism
is
often not significant,
has the "wrong" sign
significant,
2 of that table). This change in the
implies that in
OLS
in constraint
on the
per capita. In contrast, the
and when
it
is
significant, e.g.,
—coimtries with more formalism actually have
per capita. Note the change from Table
formahsm, while not always
GDP
Similarly, the
2,
where the
was negative and quite
imphed
effect of legal
coefficient
on
large (e.g., -0.18 in
legal
column
formahsm on long-run growth
or in regressions that do not control for property rights institutions,
the importance of contracting institutions
is
exaggerated because they capture some of
the differences in protection of property rights.
Appendix Table A4, which uses
mortality, has
in
Table
4.
outcome of
log population density in 1500 in place of log settler
between 6 and 9 more observations, and shows
results consistent
with those
For example, the estimated coefficient for protection against expropriation in
interest.
26
column
it is
2
0.97
1.09
is
also similar in the
compared with 0.95
compared with
0.18)
(s.e.
0.22),
(s.e.
two
GDP
0.25) in Table 4.
(s.e.
effect of
The
colmnn 4
first-stage pattern is
property rights institutions on the investment
According to the estimate in colmim
ratio.
0.16) in Table 4, while in
tables.
Table 5 shows a robust positive
to
1.53
(s.e.
2,
a one standard deviation strength-
ening of property rights causes a 0.95 standard deviation increase in the investment to
GDP ratio. In contrast, there is no significant efTect of legal formalism on the investmentGDP ratio in any specification. The coefficient on legal formahsm is negative and small
in
colmnns 5 tlirough
8,
Appendix Table A5 are
and actually
positive in
colmnns
1
through
The
4.
results in
siinilar.
Table 6 shows a strong effect of property rights institutions on credit to the private
The
sector.
coefficient of 0.28 in
column
2 implies that a
one standard deviation increase
in protection against expropriation causes a 1.2 standard deviation increase in the credit
to
GDP
ratio.
improvement
The
coefficient of 0.27 in
in constraint
cohunn 6 imphes that a one standard deviation
on the executive causes a
1.61 standard deviation increase in
credit.
Once we
formahsm
control for the effect of property rights institutions with om'
is
no longer a
specifications of Table 6.
2
and
4.
-0.08 in
When
significant determinant of credit
The
coefficient
negative,
it is
it is
formalism
m
column
is
strategy, legal
insignificant in
aU the IV
actually positive in columns
e.g.,
the coefficient of
-0.13 in Table 2).
parallel results using log population density in 1500 as
The
shghtly lower, but the effects are
coefficient of 0.25
it is
highly insignificant and small,
instrvunent in place of settler mortahty.
now
legal
column 6 (down from the univariate estimate of
Appendix Table A6 reports
are
on
—
IV
coefficients
still
large
on the property
and Mghly
rights
an
measures
significant (e.g., the
2 impfies a one standard deviation increase in protection
against expropriation causes about a one standard deviation increase in credit to the
private sector).
and
The
coefficients
on the
legal
formahsm measures
are consistently small
insignificant.
The pattern
ferent.
The
in Table 7,
effect of
where we look
at stock
market capitahzation,
is
slightly dif-
a one standard deviation increase in protection agauist expropriation
(using the coefficient of 0.21 in
in stock market capitahzation.
column
The
2) is
about 0.8 of a standard deviation increase
coefficient of 0.2 in
column 6 implies that a one
standard deviation unprovement in constraint on the executive would raise stock market
27
capitalization
by one standard deviation. With protection against expropriation
regression, the coefficient
on
legal
formalism
is
negative but not significant. In contrast,
with constraint on the executive as the measure of property rights, there
significant negative effect of legal
the estimate in colrmin
ple,
increase in legal
6,
(s.e.
a statistically
For exam-
0.07) implies that a one standard deviation
formahsm would reduce stock market
capitalization
deviation. So the effect of contracting institutions, even
smaller than that of property rights institutions.
The
when
by
0.2 of a standard
significant, is substantially
Appendix Table A7, with
results in
log population density in 1500 as the instrmnent, are similar.
There
is
property rights institutions, and a smaller effect of legal formahsm that
when competing
is
formalism on stock market development.
-0.16
in the
a strong effect of
is
significant only
against constraint on the executive.
Overall, the results in this section suggest that property rights institutions have a first-
order effect on income per capita, the ratio of investment to
stock market development. In contrast, legal
GDP,
formahsm appears
stock market development; for the other outcomes, the effect
from
zero.
Moreover, for
all variables,
and attempts
to have
The
an
effect
only on
not significantly different
the effect of legal formahsm
smaller than the effect of property rights institutions.
this pattern is robust
is
the level of credit, and
is
quantitatively
rest of this section
much
shows that
to develop a potential explanation."^^
Alternative Samples
6.2
Table 8 reruns owe basic regressions using alternative samples. To save space,
the first-stage regressions in
identical. All
full just in
Panel A; the
first
stages for Panel
B
it
reports
are almost
columns use protection against expropriation, instrumented with log
settler
mortaUty. Results using constraint on the executive as the measure of property rights or
log population density in 1500 as the instrument are very similar, but not reported to
Appendix Table A3 reports
which we instrument
through 6 and log population density in columns 7
through 12), but legal origin is entered directly. The specifications are useful since they do not restrict the
effect of legal origin to work solely through legal formalism, and are informative on whether legal origin
has a direct effect on the economic outcomes studied here. The results are similar to our baseline results
^''in
addition,
for property rights (using settler mortality in
in Tables 4
on
GDP
through
7,
but now English
partial reduced- form specifications in
columns
legal origin
1
has a negative
(i.e.,
wrong signed) and
significant effect
per capita and does not appear to be a significant determinant of stock market capitalization.
We have also experimented with other measures of credit and financial development, including the same
measures as in Tables 6 and 7 but calculated over different periods, measures of overall size of financial
system (sum of bank credit and stock market capitalization), M2 over GDP, and liquid liabilities over
GDP. The
results are similar to those in Tables 6
and
28
7,
and are available upon
request.
save space.
1
and
British colonies)
and
In columns
5,
we
columns 2 and 6 to just French
in
drop legal formalism, and examine whether there
within each legal "family"
.
There
a strong
is
is
first
1
and
and a much higher R^
(e.g.,
common
effect of
much
property rights institutions on
GDP
among common law
Columns
3
is
vs. 0.07,
for
French
comparing colmnns
is
a large significant
effect of
effect of
approximately the same within "legal families" as
The
results for the investment to
and stock market development there
is
GDP
a stronger effect
coimtries
and 7 drop the fom: "neo-Europes,"
closest geographic conditions to
Zealand, and the
law countries than
French legal origin countries). The
across aU excolonies (compare with Table 4).
ratio are similar, while for credit
property rights institutions
per capita for both legal systems (with a larger,
less precisely estimated, coefficient for
it is
Here we
law comitries can be explained by the colonization
In the second stage there
property rights on income per capita
former
of the considerable variation in
strategy of European powers.
but
(i.e.,
stage for log settler mortality in both
R^ of 0.30
2 of Panel A). This result suggests that
institutions witliin the set of
an
countries
legal origin countries.
common
specifications, with a slightly larger coefficient for
legal origin comitries
common law
sample to just
restrict the
USA.
the richest former colonies with the
i.e.,
Western Europe (Crosby, 1972): Austraha, Canada,
Tliis is useful to
show that the
New
results are not driven simply
by
the contrast between these four comitries and other former European colonies. Without
these countries, the coefficient for protection against expropriation goes
GDP
up
slightly in the
per capita, investment, and private credit regressions and increases by about
50%
market capitahzation. Legal formalism shows the same pattern as before;
it is
for stock
significant only for stock
for log
GDP
market capitalization. Legal formahsm
is
also almost significant
per capita, but with the wrong sign.
Columns 4 and
8 in Panel
A
report the
regressions just for countries above
GDP
per capita and investment-GDP ratio
median world income, to estabUsh that the
results are
not driven simply by the comparison of rich and poor countries. The results are close to
those in Table
4.
Although there are no
GDP
significant outhers in the
ratio data used here, there are
outcomes. Columns 4 and 8 in Panel
GDP
some major outhers
B
per capita and investment to
in the financial
development
drop outhers from the credit and stock market
capitalization regressions respectively. For credit, the outhers are Malaysia, South vVfrica,
29
and the United
Africa.
The
and
States,
market they are Malaysia, Singapore, and South
for the stock
change
results for property rights institutions
little;
the coefficient
0.28 (column 2 in Table 6) to 0.24 (column 4, Panel B, Table 8);
2 in Table 7) to 0.14
(column
declines, so the effect
remains highly
legal
formalism
is
no longer a
8,
Panel B, Table
8).
from
and from 0.21 (colunm
In both cases the standard error also
significant. Notably,
significant
falls
once these outliers are dropped,
determinant of stock market development.
Additional Control Variables
6.3
Table 9 includes with three important control variables from the fiterature on long-rrm
groAvth
2, 5,
8
and
financial development.'^^
and 11 control
for latitude,
inflation over 1970-97. In
Columns
1, 4,
and coltmms
7
and 10 control
3, 6,
for refigion;
colmims
9 and 12 control for log average
aU columns, we include these control variables in the
first-stage
regressions but do not report their coefficients to save space; the first-stage results are
very similar to those in earher tables.
To save
space, Table 9 only reports results using
protection against expropriation to measrue property rights and log settler mortahty as
the instrument. However, the results are similar
if
we use
constraint on the executive to
measure property rights or log population density as the instrmnent.
A
number
development
al.
of recent papers have taken religion seriously as a determinant of financial
(e.g.,
Stulz and Williamson, 2003).
We
(1999) with the percent of the population that
add to
"other"; these shares
is
100. In our specification,
base category. Including rehgion in this form hardly
against expropriation.
insignificant in
most notable change
formalism
is
The check measure
column
is
no longer
1,
use the measrue from La Porta et
in the results for stock
In
we
treat
aff'ects
MusUm and
CathoUc as the omitted
the coefficient on protection
of legal formalism remains positive, small,
and negative, smaU, and
significant.
Catholic, Protestant,
insignificant in
columns 4 and
market capitaUzation:
all cases,
in
column
7.
and
The
10, legal
the p- values of the F-test for rehgion
variables indicate that these variables theinselves are not significant.'^'^
'^'^A
fourth potential control
is
the level of
human
with our measures of property rights institutions
capital.
Unfortunately, this
—only countries with
relatively
is
highly correlated
good institutions have
encouraged the majority of the population to accumulate human capital. It is therefore difficult to
disentangle the separate effects of human capital, property rights, and the legal system without additional
instruments. When we include this measure as an exogenous regressor and use the protection against
expropriation measure, we find similar results to those in our baseline estimates. However, when we use
the constraint on the executive measure, there is too much multi-collinearity.
^^ Stulz and Williamson (2003) argue that religion should be coded differently, with a "1" for the most
popular religion of a country and a zero for all other religions, no matter how large. Using this alternative
30
It
might also be useful to control for latitude, because coimtries that are closer to the
equator are often argued to be poorer, perhaps because of the hotter cUmate or because
they are exposed to more virulent diseases. The results in Table 9 confirm findings we
have reported in other work (Acemoglu, Johnson, and Robinson, 2001, 2002)
control for institutions there
is
These tables also show there
no
significant effect for
geography on income per capita.
significant effect of
geography on investment and on
no
is
measures of financial development. The pattern of results
and
is
legal
formahsm
no longer a
Log
essentially
is
is
for
property rights institutions
michanged, except the check measiue of legal formahsm
significant determinant of stock
inflation
—once we
market capitahzation
(see
column
11).
included as the most plausible macroeconomic determinant of financial
development. Countries with high inflation are often thought to have
less
developed finan-
systems. However, the addition of this variable does not reduce the effects of property
cial
rights institutions, or increase the effects of legal
formahsm, on growth, investment, and
financial development.
Controlling for
6.4
GDP
Per Capita
We have shown robust
effects of
on investment,
and stock market development. These
credit,
GDP per capita,
property rights institutions on
as well as
results are not informative,
however, on the question of whether the effect of institutions on investment, credit and
stock market development
that
is
is,
is
direct or indirect.
One
possibihty
is
that the effect
present-day institutions affect these outcomes directly.
The polar
is
direct,
alternative
a purely indirect effect whereby current and past institutions have determined
per capita, and
GDP
per capita today
is
the
main
influence on investment
and
GDP
financial
development. In practice, both direct and indirect effects are hkely to be present.
Table 10 briefly investigates this issue.
right
Since
log
hand
(2001),
include log
side of regressions for the investment to
we do not have
GDP
We
plausible instruments for
per capita as exogenous.
tliis
As explained
GDP
GDP
ratio
per capita in 1995 on the
and
financial development.
GDP, we have no
in
choice but to treat
Acemoglu, Johnson, and Robinson
procedure generally leads to an upward bias in the estimated coefficient
for the variable treated as
exogenous, and a corresponding downward bias for the effect
of property rights institutions.
Here the problem
coding does not significantly affect our main results.
31
is
much
worse, since log
GDP
per
capita and property rights institutions are very strongly correlated precisely because these
institutions have a causal effect
4)
show that they
are a
on economic development
major determinant of
Not surprisingly given these concerns, the
collinearity,
and log
GDP
GDP
—
in fact,
our results
Table
(e.g.,
per capita.
results in Table 10
show a high degree
of
per capita, property rights institutions, and legal formalism are
not individually significant. However, joint significance tests reported in the table show
that
GDP
per capita and property rights institutions are almost always jointly highly
significant, while
GDP
per capita and legal formahsm are never jointly significant. These
results therefore confirm the overall patterns
shown above
but not contracting institutions have significant
effects
—property
rights institutions
on investment and financial devel-
opment. Unfortunately, however, they do not enable us to ascertain whether the
property rights institutions on investment and financial development
through affecting
GDP
is
effect of
direct or indirect
per capita. This remains an interesting area for future research.
Corroborating Evidence
6.5
In terms of long-rim economic and financial outcomes, our results suggest that the effects
of legal
case.
formahsm
Both
are quite hmited. Tables 11
tables use data from the
Djankov
and 12 further explore why
(with an extended sample provided by Djankov, 2003).
measures of legal formahsm; the fuU
first
may be
the
(2002) "Regulation of Entry" study
et al.
in pairs, for the protection against expropriation
this
We
show OLS and IV
results,
measure of property rights and both
IV
stage results are provided for
specifications.
Table 11 reports regressions in wlrich the log of the number of procedures for registering
a
new
business
is
the dependent variable.
This
is
a good measure of the formal steps
needed to legally start a new firm which, as shown by Djankov
et
(2002),
al.
correlated with other measiues of formal requirements imposed on firms.
results in this table indicates that
have significant
effects
both
legal
formahsm and property
is
highly
The pattern
of
rights institutions
on the nmnber of procedures.
However, in Table 12 the results are quite
actual cost of registering a
new
different.
Here the dependent variable
business, as a percent of
Property rights institutions again have a large
effect
GDP
is
the
per capita (per annum).
on these
costs:
a one standard
deviation increase in protection against expropriation reduces the cost of registering by
0.65 of a standard deviation, which
is
quantitatively similar to
32
its effect
on the number
of procedures.
in the
IV
But
no robust
in this table there is
The
specifications.
coefficient of 0.03 in
coefficient
column
on
legal
significant effect for legal
formaUsm
is
formaUsm
consistently small;
e.g.,
the
2 implies that a one standard deviation increase in legal
formalism causes only a 0.03 of a standard deviation increase in the cost of registration.
These fuidings seem to corroborate our main
a significant
effect
have more limited
Contracting institutions have
residts.
on the formal procedures that regulate business. But they appear to
on the major economic outcomes
effects
—long-rrm growth, investment,
the overall size of the financial system, and the real costs of regulation that businesses
face.
Interpretation
6.6
Our
empirical investigation reveals an interesting pattern: contracting institutions and
approximated by legal formafism, have some
legal rules, as
(the use of equity versus debt contracts)
lar,
effect
on the form of finance
and the form of business regulation
(in particu-
the nimaber of procedures necessary to open a business). But they have limited or no
effects
on major economic outcomes, including long-rim growth (cmrent income
the investment to
economy
(also
GDP
ratio,
and the
overall
amoimt of
on medium-rrm growth). Property rights
degree to which the government, pohticians, and
levels),
financial intermediation in the
institutions, wliich determine the
constrained in their relation-
efites are
ships with the rest of the society, on the other hand, matter significantly for
all
these
outcomes.
Although a precise explanation
for this pattern of results
is
not possible with our
current level of knowledge, our simple reduced-form model suggests a potential explanation: legal rules
and procedures primarily
affect the contracting relationship
private individuals, in particular between lenders and producers.
As long
institutions are not extremely dysfunctional, individuals can avoid
effects of
bad
legal rules
arrangements.
One way
we may
of contracting around these rules
see
are cheaper to enforce.
institutions
as these legal
most of the adverse
by changing the terms of their contracts or entering into informal
is
to change the form of financial
intermediation, so in places with a high degree of legal formafism
institutions),
between
more debt rather than
equity,
(i.e.,
perhaps because debt contracts
Once these adjustments have been made, the
on investments and growth
is
relatively Umited.
33
worse contracting
effect of contracting
When
it
comes to arrangements regulating property
tween the state and individuals,
i.e.,
rights
and the
relationsliip be-
property rights institutions, the option to engage in
ex ante contracts to avoid ex post distortions
is
not available. Individuals caimot write
contracts with the state to constrain futme actions by the state and ehtes controlling the
more important
Therefore, property rights institutions have a
state.
outcomes than do contracting
An
alternative,
and
effect
on economic
institutions.
related, explanation
would be based on the recent paper by
Djankov, Glaeser, La Porta, Lopez-de-SUanes, and Shleifer (2003), where they introduce
the concept of an "institutions possibihties frontier," representmg the trade-off between
and centrahzed
disorder
as
moving an economy along a given
less disorder).
Changes
on the other hand, would induce
with worse property rights institutions, a society has to
both disorder and centrahzed
property rights institutions
of legal rules
formahsm may correspond to
frontier (e.g., greater
in property rights institutions,
shifts of the frontier, so that
suffer higher costs of
we can think
control, hi terms of their framework,
may
As a
control.
have much more pronounced
result, differences in
effects
on investment and
output than do differences in contractmg institutions.
At present, these interpretations are merely conjectmes, however, and more detailed
work
is
necessary to investigate
them
in greater detail
and
also to determine the precise
channels through which property rights institutions matter so
much
for finance, invest-
ment, and long-run economic performance.
Conclusion
7
There
is
now
considerable evidence that "institutions" are of first-order importance for
economic and financial outcomes. Douglass North,
sure the importance of "contracting institutions"
izens,
rulers.
and "property
rights institutions"
,
,
for
example, emphasized in equal mea-
enabling private contracts between
cit-
protecting the property rights of citizens against
Despite the importance of these questions for the study of long-run economic per-
formance, there has been relatively httle work investigating which types of institutions
matter more and for which economic outcomes. This paper
offers
a step in that direction.
We proxied contracting institutions with the legal formalism measure of Djaiikov et
and property
rights institutions with
measures of protection
ment expropriation and constraints on govermnent power.
34
We
al.,
for citizens against govern-
used a multiple uistrumen-
tal variables strategy in the
institutions
legal rules
(i.e.,
institutions are
sample of former European colonies, where both contracting
and procedures
shaped by the experience of colonialism. In
first-stage relationships
between
and property
for private contracts)
and
legal origin
rights
this sample, there are strong
legal formalism
on the one hand, and
between colonization strategy and property rights institutions on the other. Using
multiple instrmnental variables strategy,
stitutions have a
development,
and the
wliile contracting institutions
amomit
total
Our conjectme
appear to
regulation, but have
more
affect the
form of financial interme-
limited effects on growth, investment,
that individuals can structure contracts to reduce the adverse
is
institutions, for
Because of these adjustments,
the usual effect of rules governing contracts on investment and growth
limited; exceptions occur only
when
ef-
example, by changing the form of intermediation
to reduce the cost of providing outside finance to firms.
trast,
financial
of credit in the economy.'^"
from contractmg
fects
that property rights in-
major influence on long-rmi economic growth, investment, and
and the form of
diation
we found robust evidence
tliis
may be
relatively
contracting institutions are extremely bad. In con-
because enforceable contracts between the state and individuals are not possible,
property rights institutions constraining arbitrary behavior and expropriation by the state
and
elites controlling
We
view
paper as a
tliis
first step,
and much more empirical and theoretical work
Oiu* explanation for the patterns in the data
needed.
is
the state have more important effects on economic outcomes.
and detailed work using both macro and micro data
is
is
no more than a conjecture,
necessary to investigate whether
individuals are indeed avoiding the costs of distortionary legal rules by changing the terms
of their contracts
and the form
rights institutions
black box
growth?
—how
Is it
of their financial relations. Moreover, the effects of property
on econoinic outcomes, though highly robust, axe
something of a
stiU
exactly do property rights institutions affect investment, credit, and
because the government and poUtically powerful groups are expropriatmg
the incomes of other groups?
Or
is it
because they are blocking entry by
producers? Or because they are creating a non-level playing
field
new groups and
and a
liigh
degree of
inequality?
^
'
Our
results also suggest that there
may be
a mispecification in growth regressions that use legal origin
as an instrument for financial development (see Levine, 2003, for a discussion of this
Legal origin
is
control for property rights institutions.
in these
common
approach).
correlated with total financial intermediation or credit, but this effect disappears once
we
Consequently, the instrumented financial development variable
growth regressions could be capturing the
effect of
35
property rights institutions on growth.
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Stulz,
Rene and Rohan Willicunson
(2003) "Culture, Opermess, and Finance,"
Journal of Financial Economics, forthcoming.
Willicunson, Oliver (1975) Markets and Hierarchies: Analysis and Antitrust Implications,
New
York,
NY,
Free Press.
Willicunson, Oliver (1985) The Economic Institutions of Capitalism,
NY,
New
York,
Free Press.
World Bank (2003) World Development Indicators,
39
at publications.worldbank.org/WDI/.
Table
1
Descriptive Statistics
(1)
(2)
Whole World
Sample
(3)
(4)
(5)
(6)
English
English
English
excolonies with
excolonies with
excolonies with
Excolonies
English
low settler
Sample
excolonies
mortality
medium
of Expropnation
Average Investment-GDP
ratio
Credit to the Private Sector
Stock Market Capital^ation
Log Number
Procedures
a New Business
Cost of Registering a New Business
as Percent of GDP per capita
Log Settler Mortality
of
for Registering
Mean
in
Log
6.34
5,63
(1.81)
(1.47)
(1,70)
(1.63)
(1,42)
(1,43)
(1,16)
(1,05)
(1,07)
(120)
4.48
4.15
4.48
5.65
4,54
3,57
3,99
4,32
4,87
3,31
(2.09)
(2.09)
(2.06)
(1-55)
(2,60)
(1,88)
(1.78)
(2,05)
(172)
(1,50)
3.66
378
2-77
2-38
2,57
3,15
4 65
427
479
4.60
(1.06)
(1.24)
(0.88)
(0,59)
(0,79)
(0.75)
(0,74)
(0-89)
(0.54)
Average protection against
which 13 with low
96)
375
2 99
2 98
261
3,15
4.60
4 44
4,65
4.58
(1.09)
(0.68)
(0,82)
(0,49)
(0,58)
(0.79)
(0,86)
(0,77)
(0.91)
8.36
7.91
8-17
9,04
8,21
7,65
7,71
8,20
8,23
7.22
(1.11)
(1,00)
(1-14)
(1.03)
(1,12)
(091)
(0,83)
(095)
(057)
(0,65)
14.73
12.30
1486
19 42
10,13
1367
1053
10,98
1331
8,59
(7.89)
(7.21)
(8.37)
(9,71)
(4,97)
(7,34)
(5,49)
(6,63)
(436)
(5.22)
0.42
0.36
048
083
036
0,29
0,26
0,45
027
0.19
(0.40)
(0.35)
(0,44)
(0,55)
(0,22)
(025)
(0,21)
(0 19)
(017)
(0,22)
0.22
0.17
0,30
072
0,13
004
0,07
0,18
0,07
0.03
(0.37)
(0.37)
(051)
1 88
(056)
(068)
1 64
(0,15)
(0,06)
(0,14)
(0,28)
(0,08)
209
2.19
2,61
2,38
2,68
2,62
(0,59)
(043)
(0.36)
(0.29)
(0,19)
(0,29)
(0,32)
2.25
2.27
(0 51)
(0.57)
048
0,70
049
(0.81)
(1.05)
(088)
4.25
(149)
4.68
6 with medium
1
035
1.05
0.89
0.34
1,02
1,00
(023)
(1,33)
(1.17)
(0.42)
(1,42)
(1.04)
3,01
4,56
6,14
4,93
376
4 44
5.75
(0,64)
(0,92)
(046)
(025)
(0.64)
15
0,25
-0,54
(026)
1 35
(0,94)
0.52
0,37
075
0.83
036
0.99
(1.53)
(1,77)
(253)
(1,15)
(1.13)
(1,29)
(2.61)
(120)
(0,95)
medium
500 defined only
ranges from
1
(0.09)
(018)
parentheses, "High", "medium", and "low" settler mortality are defined as roughly one
in
log population density in
risk of expropriation
settler mortality.
(0
3.73
(0.92)
n.a.
and
mortality
5,31
1500
settler mortality
high settler
(with standard deviations in parenttieses)
6,02
n.a.
values, with standard deviations
settler
6,21
former colonies' 29 English legal origin, o( which 14 with low mortality, 7 with
mortality.
mortality
6,21
(1.20)
Log Population Density
excolonies with
medium
mortality
7.93
1995 (PPP Measure)
in
excolonies with
low settler
excolonies
6.93
Legal Fonnalism (Eviction Measure)
per capita
excolonies with
French
mortality
6.39
Legal Formalism (Check Measure)
GDP
(10)
French
7.07
Constraint on the Executive
Log
(9)
French
high settler
mortality
Mean Values
Average Protection Against Risk
settler
(8)
French
(7)
mortality,
for excolonies.
and 8 with high
mortality; 51
third
each
French legal
all excolonies We have log settler mortality data for 80
which 8 with low mortality. 20 with medium mortality and 23 with high
of the distribution for
origin, of
For detailed sources and dermitions see Appendix Table A1
where a higher score indicates more protection The number of observations is 120 (whole world); 75 excolonies: 31 English legal origin excolonies of
and 12 with high settler mortality; 44 French legal origin excolonies, of which 6 with low settler mortality, 18 with medium settler mortality, and 20 with htgh
to 10,
settler mortality,
settler mortality.
Constraint on the Executive ranges from
settler mortality.
5 with medium
where a higher score indicates more constraint. The numt>er of observations is 159 (whole worid); 92 excolonies: 35 English
and 1 7 with high settler mortality: 56 French legal origin excolonies. of which 7 v/ith low settler mortality, 20 with medium settler
to 7,
1
settler mortality
Legal Formalism (Check Measure) ranges from
lo 7,
where a higher score indicates a higher
English legal ongin excolonies of which 11 with low settler mortality, 5 with
settler mortality,
and
1
settler mortality,
and 14 with high
settler mortality;
35
legal origin
Legal Fomialism {Eviction Measure) ranges from
and 6 with high
ratio
is in
with high settler mortality;
settler mortality;
current prices
is
to 7,
where a higher score indicates a higher
medium
medium
Log procedures
mortality, 2 are
is
Cost of registering a
are
medium
mortality
is
GDP
level of control or intervention in the judicial process.
settler mortality,
and 13
with high settler mortality;
26 French
settler mortality-
The number of observations
legal origin excolonies. of
is 167 (whole worid): 98 excolonies; 42 English legal ongin excolonies of which 13 with low
which 7 with low setUer mortality, 19 with medium settler mortality and 29 with high settler mortality.
of observations
The number of observations
the market value of
settler mortality
the log of
medium
The number
legal origin excolonies, of
percent of
is
165 (whole worid); 97 excolonies; 43 English
54 French legal origin excolonies, of which 8 with low
Stock Market Capitalization
mortality, 7 with
and 29 with high
is
is 1 03 {whole world); 55 excolonies; 29
which 4 with low settler mortality, 16 with medium
settler mortality.
55 French
Credit to the private sector
22 with high
mortality,
observations
Log GDP per capita in 1995 is PPP adjusted- The number of observations is 168 (whole worki); 97 excolonies; 42 English legal origin excolonies of which 13 with low
22 with high settler mortality; 55 French legal origin excolonies, of which 8 with low settler mortality, 19 wfith medium settler mortality and 28 with high settler mortality,
lnvestment*GDP
which 13 with low
legal origin excotonies of
113 (whole worid); 65 excolonies; 30
French excolonies, of which 5 with low settler mortality, 17 with medium
of
3 with high settler mortality.
English legal ongin excolonies of which 11 with low settler mortality, 5 with
settler mortality,
medium
The number
level of control or intervention in the judicial process.
and
1
all
settler mortality,
traded stocks as a percent of
19 with
GDP, The number of
medium
legal origin excolonies of
settler mortality,
observations
is 1 1
and 27 with high
settler mortality, 7 with
settler mortality, 7 with
which 14 with low
settler mortality,
medium
medium
settler mortality
7 with medium
1
and
and 22
settler mortality,
and
settler mortality.
5 (whole world); 84 excolonies; 37 English legal origin excolonies of which
7 with high settler mortality: 47 French legal origin excolonies, of which 7 with low settler mortality,
settler mortality
7 with
medium
settler mortality
number of prcicedures needed to open a new business. We have data on 82 countries in our sample, of which 43 are former colonies: 20 English
and 7 are high mortality: 23 French legal origin excolonies, of which 4 are low mortality, 1 1 are medium mortality and 8 are high mortality-
and 23 with high
1
3 with low
settler
settler mortality,
legal ongin excolonies. of
which
1
1
are low
mortality
new business as
and
a percent of
7 are high mortality:
GDP
22 French
per capita per annum.
origin excolonies, of
We have data
which 4 are low
Log Population density in 1 500 is available for 98 former colonies, of which: 42 are English
are low mortality. 20 are medium mortality, and 30 are high mortality.
on 81 countries
mortality,
origin, of
1 1
are
which
1
in
our sample, of which 42 are former colonies: 20 English origin excolonies, of which 11 are low mortality, 2
medium
mortality
and 7 are high
3 are low mortality, 7 are
medium
mortality.
mortality,
and 22 are high
mortality;
and 56 are French
legal origin, of
which 6
Table 2
GDP per capita.
Contracting Institutions:
Credit, and Stock
(2)
(3)
Excolonies
Excolonies
Sample
Sample
(1)
Whole World
Market Capitalization
(4)
(6)
(5)
Excolonies
Whole World
Sample
Excolonies Sample
2SLS, with
Check
OLS
2SLS, with
OLS
Measure
Panel A: Dependent variable
Legal Formalism (Check Measure)
-0.28
-0.21
-0.18
(0.10)
(0,10)
(0.14)
log
is
Legal Formalism (Eviction Measure)
R-Squared
in
OLS
0.07
0.07
First Stage for
in First
Panel
B.
(0.12)
(0.12)
(0.17)
0.008
0.005
0.56
99
65
Dependent var table
is
-1.85
-1.19
-\ni
(0.71)
(0.94)
OLS
0,07
0.04
110
65
Panel
Legal Formalism (Check Measure)
C.
•
65
Dependent variable
is
credit to
-0.16
-0.14
-0.13
(0.04)
(0,03)
(0.05)
55
average ratio of investment
-0.69
Number of Observations
tin?
55
to
-1.15
(1.22)
(0.82)
(0.91)
0.007
0.004
100
55
-0.08
-0.12
(0.05)
(0.07)
0.21
0.03
0.05
104
65
94
55
65
is
\
ofGDPin 1998
-0.08
0.16
Panel D: Dependent variable
55
(0.05)
OLS
in
1990s
-0.43
of Observations
R-Squared
GDP in
private sector as a percent
Legal Formalism (Eviction Measure)
Number
-0.04
0.58
-'
in
-0.06
-1.61
Legal Formalism (Eviction Measure)
R-Squared
-0.10
(0.20)
(0.67)
Legal Formalism (Check Measure)
1995
-1.87
65
109
in
(0.20)
Stage
Number of Observations
GDP per capita
Measure of Legal Formalism (Check or Eviction Measure)
English Legal Origin
R-Squared
Eviction Measure
55
stock market capitalization as a percent of GDP, average
over 1990-95
Legal Formalism (Check Measure)
-0.17
-0.17
-0.16
(0.03)
(0.04)
(0.05)
Legal Formalism (Eviction Measure)
R-Squared
in
OLS
0,24
0.26
90
62
Number of Observations
Standard errors are
is:
in
Panel A, log
62
in parentheses. All regressions are cross-sectional
GDP per capita (in PPP terms)
ratio, in current prices,
in 1995,
World Bank's
of GDP, 1990-95, from Beck
(2003a).
et al
from the World Bank's
WDI
on-line;
The independent
and
in
variable
in
WDI
0.05
80
52
52
is:
in
columns
1,
2 and 3, legal formalism, using the "check
formalism, using the "eviction measure" from Djankov, La Porta,
four panels the measure of legal formalism
is
instrumented using a
dummy
variable for
whether a country has an English legal origin, as classified by Djankov, La Porta, Lopez-de-Silanes, and Shieifer (2003) and
Djankov (2003).
GDP
Panel D, the level of stock market capitalization as a percent
4, 5,
6, legal
0.06
on-line; in Panel B, the investment to
Lopez-de-Silanes, and Shieifer (2003). In
and
-0.17
(0.07)
Panel C, level of credit to the private sector as a
measure", from Djankov (2003); in columns
all
-0.09
(0.06)
with one observation per country. The dependent variable
average over 1990s, from Penn World Tables 6.1;
percent of GDP in 1998, from the
-0.11
(0.05)
Table 3
GDP per capita.
Property Rights Institutions:
(3)
(4)
Excolonies Sample
Excolonies Sample
Excobnies Sample
(5)
Against Risk of Exprop.
in
OLS
2SLS, with
2SLS, with
2SLS, with
Constraint on
Constraint on
Exprop.
Exprop.
Executive
Executive
0.56
0.52
1.05
1.07
(0.06)
(0.19)
(0.22)
0.54
First
Log
OLS
is
log
GDP per capita
•
Settler Mortality
R- Squared
Stage
in First
65
Against Risk of Exprop.
R-Squared
in
OLS
Against Risk of Exprop.
0.17
65
65
average ratio of investment
is
5.50
5.48
(1.12)
(1.33)
65
65
is
R-Squared
in
OLS
037
0.31
(0.02)
(0.03)
(0.08)
(0.08)
0.33
109
66
66
66
Pane! D: Dependent variable
Average Protection
Against Risk of Exprop.
is
0.11
0.14
0.30
0.26
(0,03)
(0.08)
(0.09)
Constraint on Executive
R-Squared
in
OLS
0,24
0.25
95
63
63
63
WDI
on-line;
through
4,
Polity IV.
and
GDP
in
1.61
1.40
4.16
3.76
(0.42)
(1.04)
(1.08)
0.16
0.14
ratio, in current prices,
average over
1
990s, from Penn
World Tables
average protection against the risk of expropriation as used
The measure of institutions
is
in
6,1; in
8,
of GDP
in
1998
0.08
0.08
0.25
0.17
(0.02)
(0.02)
(0.06)
(0.05)
0.15
0.19
140
70
70
1
990-95
0.06
0.06
0.21
0.14
(0.02)
(0.02)
(0.06)
(0.05)
0.12
0.07
is:
66
in
Panel A, log
et al (2003a).
Acemoglu. Johnson and Robinson (200
1
1
);
in
per capita < in
The measure of institutions used
columns 5 through
850 (where mortality
using log population density in 1500 from Acemoglu, Johnson and Robinson (2002).
is
per
8, constraint
1
66
66
GDP
Panel C, the level of credit to the private sector as a percent of GDP
instrumented: in columns 3 and 7, using log settler mortality before
and Robinson (2001); and in columns 4 and
70
105
Panel D, the level of stock market capitalization as a percent of GDP, 1990-95, from Beck
69
(0.30)
Standard errors are in parentheses. All regressions are cross-sectional with one observation per country. The dependent variable
the investment to
0.24
69
1990s
stock market capitalization as a percent of GDP. average over
(0.02)
Number of Observations
GDP in
credit to the private sector as a percent
0.16
0.32
to
149
0.15
0.26
69
146
Constraint on Executive
Number of Observations
)
-0.56
0.23
Panel C: Dependent variable
Average Protection
0.34
(0.12)
3.00
65
0.35
•0.36
(0.48)
0.38
0.70
(0.15)
(0.10)
3.17
113
0.76
(0.15)
-0.80
(0.33)
0.45
0.32
(0.05)
(0.16)
Constraint on Executive
Number of Observations
0.34
(0.04)
(0.13)
Panel B: Dependent variable
Average Protection
1995
-0.57
1500
Number of Observations
in
Stage for Measure of Institutions (Protection Against Expropriation or Constraint on Executive
Log Population Density
in
(8)
Excolonies Sample
Protect. Against
(0.04)
0.63
(7)
Excolonies Sample
2SLS.with
Constraint on Executive
R-Squared
(6)
Excolonies Sample
Protect, Against
Panel A: Dependent variable
Average Protection
and Stock Market Capitalization
Credit,
(2)
(1)
PPP terms)
in
1
in
1995; in Panel B,
998, from the
as an independent variable
World Bank's
in columns
is:
on the executive, averaged over the
1
990s, from
000 per annum with replacement) from Acemoglu, Johnson
1
Table 4
GDP
Contracting vs. Property Rights Institutions:
(2)
(1)
(4)
(3)
Depe,ndeni variable
per capita
(5)
is
log
(6)
GDP per capita
in
2SLS, with
2SLS, with Protect
Protect Against
Exprop.
OLS
& Check
Agamst Exprop.
OLS
Measure
OLS
Average Protection
Against Risk of Expropriation
0.63
0.95
(0.08)
(0.16)
&
or
Second
0.64
1.53
(0.08)
(0.25)
Constraint on Executive
Legal Formalism (Checls Measure)
in
OLS
2SLS, with
Constraint on
& Check
&
Eviction
Measure
Regression
0.31
0.99
0.33
0.75
(0.07)
(0.29)
(0.07)
(0.18)
0.11
0.35
-0.16
0.05
(0.15)
(0.10)
(0.24)
0.62
Exec.
OLS
Measure
(0.09)
Legal Formalism (Eviction Measure)
R-Squared
2SLS, with
Exec.
Sta]ge
(8)
Constraint on
OLS
Eviction Measure
(7)
1995
0.28
0.45
-0.04
0.08
(0.09)
(0.16)
(0.11)
(0.20)
0.34
0.33
0.61
First Stage for Measure of Institutions (Protect. Against Expropriation or Constraint on Executive)
English Legal Origin
Log
Settler Mortality
R-Squared
in First
0.60
0.44
-0.002
-0.22
(0.31)
(0.33)
(0.48)
(0.46)
-0.71
-0.70
-0.65
-0.92
(0.12)
(0.15)
(0.19)
(0.21)
0.21
0.33
0.42
0.50
Stage
First Stage for
English Legal Origin
Log
Settler Mortality
R-Squared
in First
Stage
Standard errors are
51
in parentheses. All
per capita (PPP adjusted) in
-1.69
-1.88
-1.7
(0.24)
(0.23)
(0.24)
0.15
-0.02
0.11
0.01
(0.10)
(O.ll)
(0.09)
(0.11)
0.57
1
43
51
0.62
43
51
regressions are cross-sectional with one observation per country;
995, from the
World Bank's
protection against the risk of expropriation as used in
1990s, from Polity IV.
-1.96
(0.24)
0.63
Number of Observations
GDP
Measure of Legal Formalism (Check or Eviction Measure)
WDI
on-line.
we
The measure of institutions used
use only the excolonies sample.
as an independent variable
is:
42
The dependent
in
columns
1
variable
through
4,
is
log
average
Acemoglu. Johnson and Robinson (2001); in columns 5 through 8. constraint on the executive, averaged over the
as an independent variable is: in columns 1-2 and 5-6, the "check measure", from Djankov (2003); in columns
3-
The measure of legal formalism used
4 and 7-8, the "eviction measure" from Djankov, La Porta, Lopez-de-Silanes. and Shleifer (2003). In columns
the instruments are: a
0.56
42
51
dummy
Djankov (2003); and log
variable for whether a country has an English legal origin, as classified
settler mortality
before 1850 (where mortality
is
per 1000 per
annum with
1, 3, 5,
by Djankov, La
replacement).
and 7
we
report
OLS
results. In
Porta, Lopez-de-Silanes,
columns
2, 4, 6,
and 8
and Shleifer (2003) and
Table 5
Contracting vs. Property Rights Institutions: Investment-GDP ratio
(1)
Dependent variable
is
2SLS, with
2SLS, with
Constraint on
Constraint on
& Check
Exprop.
OLS
Measure
OLS
3,88
4.68
4.23
5.28
(0.65)
(1.11)
(0.72)
(1.18)
&
Exec.
OLS
Eviction Measure
OLS
-1.05
-0.80
(1.55)
0.47
-0.46
-0.85
(1.01)
(1.64)
0.10
-0.002
-0.22
(0.48)
(0.46)
-0.71
-0.70
-0.65
-0.92
(0.12)
(0.15)
(0,19)
(0.21)
0.21
0.33
0.42
0.50
Stage for Measure of Legal Formalism (Check or Eviction Measure)
-1.96
-1.69
-1.88
-1.70
(0.24)
(0.24)
(0.23)
(0,24)
0.15
-0.02
0.11
0.01
(0.10)
(0.11)
(0.09)
(0.11)
Stage
0.63
51
columns
1
GDP ratio,
43
through
4,
average protection against the risk of expropriation as used
executive, averaged over the 1990s, from Polity IV.
Djankov (2003);
results. In
Silanes,
in
columns
over 1990s, from Penn World Tables
columns 3-4 and
2, 4, 6,
51
are: a
we
use only the excolonies sample. The dependent variable
The measure of institutions used
as
an independent variable
as an independent variable
is:
in
columns 1-2 and
dummy variable
for
settler mortality
whether a country has an English
before 1850 (where mortality
is
legal origin, as classified
per
1
8,
is:
1, 3, 5,
constraint
and 7
by Djankov, La
000 per annum with replacement).
we
is
in
on the
5-6, the "check measure",
measure" from Djankov, La Porta, Lopez-de-Silanes, and Shleifer (2003). In columns
and Shleifer (2003) and Djankov (2003); and log
42
42
51
Aceraoglu, Johnson and Robinson (2001); in columns 5 through
The measure of legal formalism used
7-8, the "eviction
and 8 the instruments
in
6.1.
0.56
0.62
0.57
43
51
in current prices, average
on Executive)
0.44
Standard errors are in parentheses. All regressions are cross-sectional with one observation per country;
the investment to
0.06
(Protect. Against Expropriation or Constraint
(0.33)
Settler Mortality
in First
0.91
0.60
English Legal Origin
R-Squared
3.91
(1.40)
(0.31)
Stage
Number of Observations
& Eviction
Measure
(1.20)
0,47
Measure of Institutions
First
Log
1,04
(0.66)
(0.83)
Settler Mortality
in First
4.70
(1.87)
0.57
English Legal Origin
R-Squared
1.08
(0.57)
(1.08)
1.57
Exec.
OLS
or Second St age Regression
0.67
First Stage for
Log
& Check
Measure
(0.71)
(0.85)
in
1990s
2SLS, with
Legal Formalism (Eviction Measure)
R-squared
(8)
(7)
GDP in
Protect Against
Constraint on Executive
Legal Formalism (Check Measure)
to
2SLS, with
OLS
Against Risk of Expropriation
(6)
average ratio of investment
Protect Against
Exprop.
Average Protection
(5)
(4)
(3)
(2)
report
from
OLS
Porta, Lopez-de-
Table 6
Contracting vs. Property Rights Institutions: Private Credit
(2)
(1)
(3)
(4)
Dependent variable
is
(fi)
(5)
credit to the private sector in
1
99S as a percent oj
2SLS, with Protect
&
Exprop.
Against Exprop.
OLS
Check Measure
OLS
0.13
0.28
0.19
0.36
(0.04)
(0.07)
(0.05)
(0.09)
OLS
Average Protection
Against Risk of Expropriation
&
2SLS, with
Constraint on
Constraint on
Exec.
OLS
Eviction Measure
or
in
OLS
in First
-0.13
-0.08
(0.08)
0.001
-0.08
-0.13
(0.09)
(0.05)
(0.08)
0.34
Stage
Settler Mortality
in First Stage
0.44
-0.002
-0.22
(0.33)
(0.48)
(0.46)
-0.71
-0.70
-0.66
-0.92
(0.12)
(0.15)
(0.19)
(0.21)
0.21
0.33
0.42
Measure of Legal Formalism (Check or Eviction Measure)
-1.96
-1.69
-1.88
-1.70
(0.24)
(0.24)
(0.23)
(0.24)
0.15
-0.02
0.11
0.01
(0.10)
(0.11)
(0.09)
(0.11)
0.57
43
51
51
average protection against the
the 1990s, from Polity IV.
columns 3-4 and
4, 6,
risk
51
in 1998,
we
42
51
use only the excolonies sample. The dependent variable
from the World Bank. The measure of institutions used as an independent variable
of expropriation as used
in
42
is;
in
columns
1
is
through 4,
Acemoglu, Johnson and Robinson (2001); in columns 4 through 8, constraint on the executive, averaged over
as an independent variable is: in columns 1-2 and 5-6, the "check measure", from Djankov (2003); in
The measure of legal formalism used
7-8, the "eviction
and 8 the instruments
of GDP
0.56
0.62
43
Standard errors are in parentheses. All regressions are cross-sectional with one observation per country;
credit to the private sector as a percent
0.13
0.60
0.63
Number of Observations
0.28
(0.31)
0.50
English Legal Origin
R-Squared
0.01
(0.05)
Stage for Measure of Institutions (Protect. Against Expropriation or Constraint on Executive)
First Stage for
Log
0.19
(0.06)
(0.04)
Settler Mortality
R-Squared
0.06
(0.03)
0.01
English Legal Origin
Log
0.27
(0.10)
(0.07)
First
& Eviction
Measure
0.06
-0.09
0.42
Exec.
OLS
(0.03)
(0.04)
Legal Formalism (Eviction Measure)
R-squared
& Check
Measure
Second Stage Regression
Constraint on Executive
Legal Formalism (Check Measure)
GDP
2SLS,with
2SLS. with
Protect Against
(7)
are;
and Djankov (2003); and log
measure" from Djankov, La Porta, Lopez-de-Silanes. and Shleifer (2003). In columns 1,3,5, and 7
dummy
we
report
OLS
results. In
columns
2,
vanable for whether a country has an English legal origin, as classified by Djankov, La Porta, Lopez-de-Silanes, and Shleifer (2003)
settler mortality
before 1850 (where mortality
is
per 1000 per
annum with
replacement).
Table 7
Contracting vs. Property Rights Institutions: Stock Maricet Capitalization
(1)
(2)
Dependent variable
is
Against Risk of Expropriation
2SLS, with
2SLS, with
2SLS, with
Protect Against
Constraint on
Constraint on
&
0.10
0.21
(0.04)
(0.07)
&
Exprop.
OLS
Check Measure
Exec.
OLS
Eviction Measure
or
in
OLS
0.32
(0.06)
(0.10)
R-Squared
-0.17
-0.16
(0.07)
-0.03
-0.10
-0.10
-0.20
(0.07)
(0.10)
(0.06)
(0.08)
0.23
Stage
English Legal Origin
Settler Mortality
R-Squared
in First Stage
(Protect.
Against Expropriation or Constraint on Executive)
0.61
0.45
-0.05
-0.28
(0.31)
(0.33)
(0.49)
(0.46)
-0.71
-0.70
-0.65
-0.91
(0.12)
(0.15)
(0.19)
(0.21)
0.42
0.20
0.33
Measure of Legal Formalism (Check or Eviction Measure)
-2.00
-1.76
-1.93
-1.77
(0.24)
(0.23)
(0.23)
(0.23)
0.15
-0.004
0.11
0.004
(0.09)
(0.10)
(0.09)
(0.11)
0.66
50
42
50
Standard errors are in parentheses. All regressions are cross-sectional with one observation per country;
1
GDP
in
1990-95, from Beck
et al
(2003).
0.62
0.65
0.62
42
50
the level of stock market capitalization as a percent of
0.11
0.31
Measure of Institutions
0.50
Number of Observations
0.17
(0.06)
(0.04)
First Stage for
Log
0.05
(0.04)
-0.10
0.43
in First
0.20
(0.09)
(0.07)
Settler Mortality
we
50
41
Djankov (2003);
results. In
Silanes,
in
columns
1
990s, from Polity IV.
columns 3-4 and
2, 4, 6,
The measure of legal formalism used
7-8, the "eviction
and 8 the instruments
are; a
as an independent variable
as an independent variable
is:
in
columns
1
-2
and
and Shleifer (2003) and Djankov (2003); and log
variable for whether a country has an English legal origin, as classified
settler mortality
before 1850 (where mortality
is
per 1000 per
annum with
8,
in
is
columns
on the
"check measure", from
1, 3, 5,
and 7
by Djankov, La
replacement).
is;
constraint
5-6, the
measure" from Djankov, La Porta, Lopez-de-Silanes, and Shleifer (2003). In columns
dummy
41
use only the excolonies sample. The dependent variable
The measure of institutions used
through 4, average protection against the risk of expropriation as used in Acemoglu, Johnson, and Robinson (2001); and in columns 5 through
executive, averaged over the
& Eviction
Measure
0.04
-0.15
English Legal Origin
Exec.
OLS
(0.03)
(0.05)
First Stage for
Log
& Check
Measure
Second Stage Regression
0.17
Legal Formalism (Eviction Measure)
R-squared
(8)
2SLS, with
Constraint on Executive
Legal Formalism (Check Measure)
(7)
(6)
stock market capitali. alion. average 1990-95. as a percent of GDP
OLS
Average Protection
(5)
Protect Against
Exprop.
OLS
(4)
(3)
we
report
OLS
Porta, Lopez-de-
Table 8
Contracting vs. Property Rights Institutions: Alternative Samples
(1)
(2)
(3)
French
Just
Just
Common
legal origin
Law
countries
countries
Dependent variable
Panel A:
is
log
(4)
(5)
(7)
(6)
Without
Just countries
neo-
above median
Just
Common
legal origin
neo-
Europes
world income
Law
countries
countries
Europes
GDP per capita
Just
1995
in
French
Dependent variable
Without
investment-GDP
is
(8)
Just
countnes
above median
world income
ratio in 1990s
Second Stage Regression
Average Protection
Against Risk of Expropriation
1.12
1.45
1.10
1.15
6.30
5.37
5.72
6.65
(0.27)
(0.67)
(0.23)
(0.29)
(1.78)
(2.46)
(1.57)
(2.18)
Legal Formalism
(Check Measure)
0.31
0.40
0.26
1.52
(0.16)
(0.22)
(1.12)
(1.63)
First Stage for
English Legal Origin
Log
in First
0.61
0.33
0.61
(0.30)
(0.39)
(0.30)
(0.39)
-0.59
-0.32
-0.55
-0.65
-0.59
-0.45
-0.55
-0.65
(0.19)
(0.19)
(0.13)
(0.19)
(0.19)
(0.20)
(0.13)
(0.19)
0.30
0.07
0.32
0.41
0.30
0.12
0.32
0.41
Settler Mortality
R-Squared
Stage
First
English Legal Origin
Log
Settler Mortality
R-Squared
in First
Average Protection Against Risk of Expropriation
0.33
Stage
Number of Observations
40
25
Stage for Check Measure of Legal Formalism
-1.89
-2.16
-1.89
-2.16
(0.26)
(0.32)
(0.26)
(0.32)
0.09
0.12
0.09
0.12
(0.11)
(0.16)
(0.11)
(0.16)
0.56
0.65
0.56
0.65
47
42
47
42
40
25
Just French
Without
Just
Common
legal origin
neo-
Without
Just
Common
legal origin
neo-
Without
Law
countries
countries
Europes
Outliers
Law
countries
countries
Europes
Outliers
Dependent variable
is
Just
Dependent variable
credit to the private sector as a
percent of GDP
Panel B:
Average Protection
Against Risk of Expropriation
0.44
0.24
0.35
0.24
0.39
(0.17)
(0.11)
(0.06)
(0.15)
(Check Measure)
Number of Observations
40
26
is
stock market capitalization as a
percent of GDP
(0.13)
Legal Formalism
Without
French
0.09
0.36
0.14
(0.05)
(0.11)
(0.05)
-0.03
-0.02
-0.14
-0.06
(0.08)
(0.06)
(0.07)
(0.05)
47
48
25
46
38
47
Standard errors are in parentheses. All regressions are two stage least squares; cross-sectional data with one observation per country;
the excolonies sample.
line; in
columns
sector as share of
Beck
et al.
The dependent
5-8, Panel
GDP
(2003a).
variables are: in
A, investment-GDP
in 1998,
ratio,
from the World Bank's
The measure of institutions used
colunms
1-4,
Panel A, log
GDP per capita,
PPP
adjusted, fi^om the
average over 1990s, from Penn World Tables 6.1;
WDI
on-line; in
columns
as an independent variable
5-8, Panel B, stock
is
in
columns
1-4,
we
World Bank's
use only
WDI
on-
Panel B, credit to the private
market capitalization as share of GDP, from
average protection against risk of expropriation, as used
in
Acemoglu, Johnson, and Robinson (2001). The measure of legal formalism used as an independent variable is the "check measure", from Djankov
(2003). The instruments are: in columns 3-4 and 7-8 a dummy variable for whether a country has an English legal origin, as classified by Djankov,
La
Porta, Lopez-de-Silanes,
per
annum with
Columns
3
and Shieifer (2003) and Djankov (2003);
and 7 drop the four "neo-Europes": Australia, Canada,
below median world income (using
all
in all
columns, log
settler mortality
before 1850 (where mortality
is
per 1000
replacement).
GDP per capita,
former colonies of European Powers for which
PPP,
New Zealand,
in 1995). In
we have
data.
and USA.
columns 4 and
8,
In
Panel B,
columns 4 and
we
8,
Panel A,
we drop
all
countries
drop outliers. The Excolonies Sample includes
For more detailed data definitions and sources see Appendix Table
1
Table 9
Contracting vs. Property Rights Institutions: Other Control Variables
(I)
(4)
(2)
Dependent variable
log
is
GDP
per capita
in
(5)
1995
Religion
is
(S)
(7)
(6)
Dependent Variable
investment-GDP
Inflation
Religion
Latitude
Dependent variable
private credit as a
percent of GDP
ratio
Log
Latitude
is
Log
Inflation
(12)
is
stock market
capitalization as percent of
Log
Religion
(II)
(10)
(9)
Dependent Variable
Inflation
Religion
Latitude
GDP
Log
Inflation
Second Stage
Average Protection
Against Risk of Expropriation
0.88
0.96
0.98
3.65
5.60
4.68
0.28
0.30
0.28
0.21
0.28
0.22
(0.16)
(0.18)
(0.16)
(1.36)
(1.32)
(1.13)
(0.09)
(0.09)
(0.07)
(0.09)
(0.09)
(0.07)
Legal Formalism
0.09
0.34
0.32
-2.56
0.93
0.55
-0.05
0.001
0.01
-0.14
-0.08
-0.10
(Check Measure)
(0.28)
(0.15)
(0.16)
(2.31)
(1.14)
(1.14)
(0.15)
(0.08)
(0.07)
(0.15)
(0.08)
(0.08)
p-value for religion
[0,50]
Latitude
Log
037
-12.70
0,31
-0.86
(1.00)
(7.42)
(0.49)
(0.51)
0.08
0.11
-0.03
-0.02
(0.09)
(0.65)
(0.70)
(0.04)
Inflation
First Stage for
English Legal Origin
Log
Settler Mortality
R-Squared
in First
Stage
Average Protection Against Expropriation
0.09
0.61
0.58
0.09
0.61
0.58
0.09
0.61
0.58
0.08
0.62
0.58
(0.42)
(0.31)
(0.33)
(0.42)
(0.31)
(0.33)
(0.42)
(0.31)
(0.33)
(0.44)
(0.31)
(0.33)
-0.70
-0.65
-0.71
-0.70
-0.65
-0.71
-0.70
-0.65
-0.71
-0.70
-0.65
-0.71
(0.12)
(0.13)
(0.13)
(0.12)
(0.13)
(0.13)
(0.12)
(0.13)
(0.13)
(0.13)
(0.14)
(0.13)
0.55
0.52
0.50
0.55
0.52
0.50
0.55
0.52
0.50
0.55
0.52
0.50
First Stage for
English Legal Origin
Log
Settler Mortality
R-Squared
in First
Stage
-1.10
-1.97
-1.94
-1.10
-1.97
-1.94
-1.10
-1.97
-1.94
-1.13
-2.01
-1.94
(0.24)
(0.25)
(0.28)
(0.24)
(0.25)
(0.28)
(0.24)
(0.25)
(0.29)
(0.24)
(0.25)
0.19
0.12
0.15
0.19
0.12
0.15
0.19
0.12
0.15
0.19
0.12
0.15
(0.08)
(0.11)
(0.09)
(0.08)
(0.11)
(0.09)
(0.08)
(0.11)
(0.09)
(0.08)
(0.10)
(0.09)
0.76
0.64
0.66
0.76
0.64
0.66
0.76
0.64
0.66
0.76
0.66
0.66
51
51
50
51
51
50
51
51
50
50
50
50
Standard errors are in parentheses. All regressions are two stage
log
GDP per capita
independent variables
in
Check Measure of Legal Formalism
(0.28)
Number of Observations
3,
least squares; cross-sectional data
columns
1,
4 and 7.
dummy
absolute normalized value of distance from the equator
variables for majority religions, Protestant,
(i.e..
a standardized
measure of latitude),
in
we use only the excolonies sample. The dependent variables are: in columns
of GDP; in columns 10-12, stock market capitalization as share of GDP. The
with one observation per country;
1995; in columns 4-6, invcstment-GDP ratio, average over 1990s; in columns 7-9, private credit as share
are: in
[0.4S]
[0.82]
[0.24]
Muslim, and Other, with Catholic as the omitted category, from La Porta
which
a higher value indicates that a country's capital
average annual inflation in the Consumer Price Index from 1970 to 1997, from the World Bank. The other control variables are included
The measure of legal formalism used
as an independent variable
over the 1990s, from Polity IV. The instruments are; a
(2003); and log settler mortality before
1
detailed data definitions and sources see
Is
the "check measure",
dummy variable
850 (where mortality
Appendix Table
1
is
per
1
for
in the first
is
further
origin, as classified
(1999); in columns 2, 5 and 8, the
from the equator;
columns
in
3,
6 and 9. the log of
stage but not reported to save space.
from Djankov (2003). The measure of institutions used as an independent variable
whether a country has an English legal
et al
is
constraint
on the executive, averaged
by Djankov, La Porta, Lopez-de-Silanes, and Shleifer (2003) and Djankov
000 per annum with replacement). The Excolonies Sample includes
all
1 -
former colonies of European Powers for which
we have
data.
For more
Investment-GDP
Depend e III
V
2SLS, wiih
lahlc r
nera^e
ratio imeslmi'nt lo
2SLS. wiih
Protect Against Protect Against
Exprop,
&
Exprop
ratio, Credit,
&
Check Measure Check Measure
Table 10
and Market Capitalization: Controlling for
GDP in IVWs
2SLS,with
2SLS,wUh
Prolecl Against
Protect Against
I:\prap
&
&
Exprop
tviclion
Eviction
Measure
Measure
Dfpendet
iahle
is
2SLS, with
2SLS. with
Protect Against
Protect Against
Exprop.
&
Check Measure
Exprop
&
Check Measure
credit to
GDP
per capita
pn\ale wiior
Dependent variable
2SLS.with
2SLS.wiih
Protect Against
Protect Against
Exprop
&
&
Exprop
Eviction
Eviction
Measure
Measure
is
2SLS, wilh
2SLS, wiih
Protect Against
Protect Against
Exprop &
Exprop &
Check Measure Check Measure
market capitalization
2SLS. with
:SLS. uith
Protect Against
Prolecl Against
Exprop
&
&
Exprop
Eviction
Eviction
Measure
Measure
Seconii Stage Regression
Average Protection
-0
Against Risk of Expropnalion
59
(672)
Legal Formaiism (Ciieck Measure)
1
28
(2 66)
5.11
271
J 14
051
-O04
(9.27)
(20.17)
(404)
(0.64)
(042)
GDP per capita
p-value for joint
Check Measure
GDP
0.07
-Oil
003
-0 14
(0.25)
(0.18)
(0.25)
(0.22)
-0.18
0-02
0.62
-0.18
0.60
-0-22
(2.03)
(2.29)
(012)
(2.53)
(0 15)
GDP per capita
in
2.57
2 42
fl.24
0.27
-1.47
0.37
-0.21
0.15
(19 49)
(3.38)
(058)
(034)
(5.20)
(0.20)
(0.57)
(041)
(5 76)
(026)
|0 00)
10.00]
(000)
10.00]
1001]
10.00]
10.43]
|000)
10.05]
10.00)
10.59]
10.00)
10-46)
(0.42)
10.65)
10.36]
1090]
(0,62)
1096]
1020)
10,42]
10.49)
10.89)
10.32)
0,67
0.80
(025)
(024)
70
(028)
65
in
1995
080
070
0.71
0.70
082
0.75
0.73
(0-24)
(0.28)
(0.25)
(0.25)
(0.24)
(0.28)
(0-26)
-0,17
0.80
(0.13)
(022)
-1
Settler Moruility
GDP per capita
in
1
(0.08)
1995
Number of Observations
Standard errors are
(0-20)
-0.08
(009)
(0.08)
0.70
084
0.80
0.95
0.70
0.86
(0.16)
(0.17)
(0 13)
(0.22)
(0.16)
(0.17)
0.68
062
061
0.53
-0 12
(0,09)
0.81
099
071
(0.13)
(023)
(0,16)
056
0.68
0.62
0-58
97
-1.94
-1-72
-1.66
-1.97
-1.94
-1.72
-1.66
-2.02
-1.98
-1.81
-173
(022)
(0,25)
(0-22)
(024)
(0.22)
(0.25)
(0.22)
(0.24)
(0.21)
(0.23)
(0.20)
50O
SUlge
(0.15)
-0.12
062
61
053
Suigc for Legal Formalism (Check or Eviction Measure)
005
-0-08
0.05
in
(0.20)
-0.07
68
(018)
(0 14)
Log Population Density
-001
-0.16
-0.03
(015)
(0 09)
0.84
Stage
0.67
(0.25)
-012
(0.17)
Stage for Prolcclion Against Expropnation
0-71
-0.03
095
(024)
in First
-1
(0.25)
(0.20)
-007
1500
English Legal Origin
R-Squared
026
064
(751)
First
Log
-0 04
(0 31)
(858)
(008)
Log
95)
5 35
(0 15)
in First
1.96
(5
(6 14)
-017
Settler Mortality
Log Population Density
R-Squared
O04
(0.51)
099
Firei
Log
0-42
(0.62)
per capita
English Legal Origin
Log
-012
(0.24)
GDP per capita
test
of Formalism and
1995
Protection against
test
Lxpropriation and
p-value for joint
in
83
(4.02)
Legal FonTialism (Eviction Measure)
Log
1
(5.38)
003
-0.08
-0.13
(0 14)
(0.18)
(0.14)
(0.17)
0.03
-0.04
0.03
-0.04
0.04
-0.03
(008)
(0.08)
(0.08)
(008)
(0.08)
(0.07)
-0.14
-0 12
(0.16)
(0.12)
0.62
0.63
51
57
in parentheses, All regressions are cross-sectional
09
-0.09
-0-14
-0.12
-0.09
-0.09
0.18
0.13
-0.18
-Oil
(0-20)
(0.14)
(016)
(0,12)
(0.20)
(014)
(0.16)
(0-12)
(0 19)
(013)
0.57
062
063
0.57
0.57
0.65
0.60
0.60
51
57
56
42
48
-0
57
43
49
with one obserNation per countr>':
we use only
the excolonics sample
The dependent
43
variable
67
49
is:
in
columns
50
1
through
4, the
investment
to
GDP ratio, in current pnces, average over
1990s,
World Bank, and m columns 9 through 12, stock market capiializaiion as a percent of GDP in 1990-95, from Beck el al (2003). The
measure of institutions used as on independent variable is average protection against the risk of expropriation as used in Accmoglu, Johnson and Robinson (2001). The measure of legal formalism used as an independent variable is; in columns 1-2. 5-^, and 9-10
the "check measure", from Djankov (2003), m columns 3-4. 7-8. and 1-12 the "eviction measure" from Djankov, La Porta, Lopez-de-Silanes, and Shleifer{2003). The instruments are; mail columns, log GDP per capita in 1995 and a dummy variable for
whether a country has an English legal origin, as classified by Djankov. La Porta, Lopcz-de>Si lanes, and Shieifer (2003) and Djankov (2003); in odd numbered columns, log settler mortality before I8S0 (where mortality is per 1000 per annum with
from Penn World Tables
6.1; in
columns
5 through 8. credit
tolhe pnvale sector as a percent of GDP
1
replacement), and in even numbered columns, log population density in 1500.
in
1998. from the
Table
1
Contracting vs. Property Rights Institutions: Procedures for Entry
(2)
(1)
(3)
Dependent variable
is
log
Legal Formalism (Check Measure)
2SLS, with
2SLS, with
2SLS, with
2SLS, with
Protect Against
Protect Against
Protect Against
&
in
OLS
&
Exprop.
Exprop.
&
Exprop.
OLS
Check Measure
OLS
-0.17
-0.20
-0.21
-0.31
-0.17
-0.24
-0.21
-0.27
(0.05)
(0.08)
(0.05)
(0.09)
(0.04)
(0.10)
(0.05)
(0.08)
OLS
Eviction Measure
or
&
Eviction Measure
Second Stage Regression
0.15
0.18
0.16
0.16
(0.08)
(0.05)
(0.08)
0.17
0.21
0.17
0.22
(0.06)
(0.09)
(0.06)
(0.08)
0.50
0.51
0.50
OLS
Check Measure
(0.05)
Legal Formalism (Eviction Measure)
R-squared
(8)
number of procedures for registering a new business
OLS
Against Risk of Expropriation
(V)
(6)
Protect Against
Exprop.
Average Protection
(5)
(4)
0.52
First Stage for Protection Against Expropriation
English Legal Origin
Log
Settler Mortality
0.53
0.35
0.83
0.51
(0.32)
(0.34)
(0.32)
(0.31)
-0.72
-0.71
(0.12)
(0.15)
Log Population Density
R-Squared
in First
Stage
0.43
0.51
First Stage for
English Legal Origin
Log
Settler Mortality
in First
Stage
48
the log of the
number of procedures needed
0.37
-1.86
-1.64
-1.87
-1.60
(0.25)
(0.22)
(0.22)
0.16
-0.01
(0.10)
(0.11)
48
40
to register a business,
expropriation as used in Acemoglu, Johnson and Robinson (2001).
0.08
0.003
(0.06)
(0.06)
0.54
0.61
40
54
54
Standard errors arc in parentheses. All regressions arc cross-sectional with one observation per country;
is
0.35
(0.25)
0.62
Number of Observations
-0.38
(0.08)
Measure of Legal Formalism (Check or Eviction Measure)
Log Population Density
R-Squared
-0.36
(0.09)
we
use only the excolonies sample.
from Djankov (2003). The measure of institutions
The measure of legal formalism used
0.55
is
46
46
The dependent
variable
average protection against the risk of
as an independent variable
is:
in
columns 1-2 and
5-6, the
"check measure", from Djankov (2003); in columns 3-4 and 7-8, the "eviction measure" from Djankov, La Porta, Lopez-de-Silanes, and Shieifer (2003). In columns
3, 5,
and 7 we report
classified
OLS
results. In
columns
2, 4, 6,
and 8 the instruments
are: in all colurrms, a
by Djankov, La Porta, Lopez-de-Silanes, and Shieifer (2003) and Djankov (2003);
per 1000 per
annum with
replacement); and in colunms 6 and
8,
in
dummy
columns 2 and
log population density in 1500.
I,
variable for whether a country has an English legal origin, as
4, log settler mortality before
1850 (where mortality
is
Table 12
Contracting vs. Property Rights Institutions: Cost of Entry
(11
(3)
(2)
is
cost of registering 3
<
&
Exprop.
&
2SLS. with
2SLS, with
Protect Against
Protect Against
Eviction
-0.44
-0.23
-0.38
-0.40
-0.28
-0.22
-0.25
(0.11)
(0.18)
(0.05)
(0.09)
(0,10)
(0.22)
(0.05)
(0.09)
Measure
Check Measure
-0,07
0.03
0.06
0.11
(0.18)
(0.11)
(0.19)
-0.13
-0.17
-0.12
0.10
(0.10)
(0.06)
(0.09)
0.28
Settler Mortality
0.29
Stage for Protection Against Expropriation
First
English Legal Origin
0.53
0.37
0.83
0.51
(0.32)
(0.32)
(0.32)
(0.31)
-0.72
-0.71
(0.12)
(0.15)
Log Population Density
Stage
Log
0.43
0.51
Settler Mortality
R-Squarcd
in First
Stage
is
-1.64
-1.87
-1.6
(0.25)
(0.22)
(0.22)
0.16
-0.01
(0,10)
(O.II)
0.54
0.62
48
the cost of registenng a business as a percent of
average protection against the risk of expropriation as used
columns
1-2
40
and Shleifer (2003).
In
columns
1, 3,
5.
1
in
850 (where mortality
is
per
1
La
OLS
0.55
wc
46
46
54
use only the cxcolonies sample. The dependent
from Djankov (2003). The measure of institutions used as an independent variable
results. In
in
columns 3-4 and
columns
2, 4, 6,
in
columns 6 and
8,
1
).
The measure of legal formalism used
7-8, the "eviction
is
as an independent
measure" from Djankov, La Porta, Lopez-de-
and 8 the instruments
Porta, Lopcz-dc-Silanes. and Shleifer (2003)
000 per annum with replacement); and
0.003
(0.06)
54
Acemoglu, Johnson, and Robinson (200
and 7 we report
has an English legal origin, as classified by Djankov,
before
GDP per capita,
0.08
(0.06)
0.61
40
and 5-6. the "check measure", from Djankov (2003);
is: in
Silanes,
0.37
-1.86
48
variable
0.35
(0.25)
Standard errors arc in parentheses. All regressions arc cross-sectional with one obscr\'ation per country;
vanablc
-0.38
(0.08)
i
Log Population Density
Number of Observations
-0.36
(0.09)
Stage for Measure of Legal Formalism (Check or Eviction Measure)
First
English Legal Origin
Eviction Measure
(0.07)
0.33
0.30
OLS
or Second Stage Regress ion
(0.12)
OLS
in First
&
Exprop.
-0.43
Legal Formalism (Eviction Measure)
R-Squared
&
Exprop.
OLS
OLS
Legal Formalism (Check Measure)
Log
(8)
Measure
OLS
in
(7)
ofGDPpt'r capita
OLS
Average Protection
R-squared
(6)
business as percent
Protect Against
Check
Against Risk of Expropriation
new
2SLS. with
Protect Against
Exprop.
(5)
(4)
Dependent variable
2SLS. with
arc: a
and Djankov (2003);
log population density in
1
in
dummy
variable for whether a country
columns 2 and
500.
4, log settler mortality
Appendix Tables: Not for Publication
Appendix Table Al
Variable Definitions and Sources
Variable
Source
Description
Average Protection against Expropriation Risk
Risk of expropriation of private foreign investment by government, from
calculated ihe
mean
value for the scores in
to 10,
where a higher score means
years from 1985 to 1995. This variable
all
is
less risk.
We
Acemoglu,
as previously used in
Johnson, and Robinson (2001).
Dataset obtained directly from Political Risk Services, September 1999. These data
were previously used by Knack and Keefer(l995) and were organized
in electionic
form by the IRIS Center (University of Maryland). The original compilers of these
data are Political Risk Services.
A
Constraint on Executive
seven category scale, from
authority; score
I
of 3 indicates
to 7, with a higher score indicating
1990
Legal Formalism (Check Measure)
to
more constraint Score of
I
indicates unlimited
IV
Polity
dataset,
downloaded from Intcr-Unjversity Consortium
moderate limitations; score of 5 indicates substantial limitations, score of 7 indicates Social Research. Variable described
slight to
executive parity or subordination. Scores of 2,
4,
and 6 indicate intermediate values.
in
for Political
and
Gurr (1997).
We calculated average values from
2000. inclusive, treating interregnums as missing values.
Index of formality
in legal
procedures for collecting on a bounced check, from
1
Djankov (2003), an extension of the data
to 7.
Djankov, La Porta, Lopez-de-Silanes,
in
and Shieifcr (2003).
Legal Formalism (Eviction Measure)
Log
GDP per capita in
1995 (PPP Measure)
Average Investment -GDP
ratio in
1990s
Index of formality in legal procedures for evicting a tenant fornonpayment of rent, from
Logarithm of GDP per
Ratio of investment to
year
Credit to the Private Sector (or private credit)
As
is
capita,
GDP,
on Purchasing Power
in currenl prices,
I
Djankov, La Porta, Lopez-de-Silanes, and Shleifer (2003)
to 7.
World Bank, World Development
Parity Basis, in 1995.
average from 1990 to 1999, If data are missing for a country
in
any year,
this
Penn World Tables version
web
ignored in calculating the average.
a percent of GDP in 1998: financial resources provided to the private sector, such as through loans, purchases of
at
6.I.,
Indicators, on-line version,
February 2003.
Heston, Suimners. and Aten (2002), d
ht^:/Avebhost.bridgcw.cdu/baterv'
World Bank (2003), Worid Development
Indicators, on-line version, Febniaiy 2003.
nonequity securities, and trade credits and other accounts receivable, that establish a claim for repayment For some
countries these claims include credit to public enterprises.
Stock Market Capitalization
Market value of all traded stocks as
a percent
of GDP, average over 1990-95
web
Beck, Demirgii^-Kunt, and Levine(2003a); data from the
at
http://www.woridbank.org/rcsearch/bios/tbeck/LPF.xls.
Procedures for Registering a
New
Bi
Number of separate procedures needed
to register
a
new
Djankov (2003), an extension of the data
business
in
Djankov, La Porta, Lopez-de-Silanes,
in
Djankov. La Porta, Lopez-de-Silanes,
and Shleifer (2002).
Cost of Registering a
New
Business
Alternative Measure of Credit to the Private Sector
Cost of registering a
Credit by deposit
new
business, as a percent of
money banks and
GDP per capita
Djankov (2003), an extension of the data
and Shleifer (2002).
other financial institutions to the private sector as share of GDP, average over 1980-95.
web
Beck, Demirguij-Kunt, and Levine (2003a); data from the
at
http://w\vw worldbank.org/research/bios/tbeck/LPF xls
M2
M2 monetary aggregate, as percent of GDP, average over
1
Beck, Demirgui;-Kunt, and Levine (2001
980-95.
h ttp
Liquid Liabilities
Ratio of cunency plus
demand and
interest-bearing liabilities of banks
and nonbank financial intermdiaries
to
GDP,
average over 1980-95.
Alternative Measure of Stock Market Capitalization
:
//
),
data from the
www w ori dbank .org/research/proj ec ts/
.
fi
web
at
nstruc ture/datab ase
web
Beck, Demirgu^-Kunt, and Levine (2003a); data from the
.
htm
at
http ://wwT.v.wori dbank.org/reseaTch/bios/tbeck/LPF xls
,
Ratio of total value of outstanding traded shares to
GDP,
average over 1980-95.
web at
Beck, Demirguij-Kunt, and Levine (2003a); data from the
http://www.worldbank.org/research/bios/tbeck/LPF.xls
Overall Size of Financial System
Credit lo the private sector, as percent of GDP, in 1998 plus stock market capitalization, average over 1990-95
Credit from
World Bank (2003), World Development
Indicators, on-line version,
February 2003. Stock market capitalization from Beck et
web
Overall Size of Financial System, Alternative
Deposit
money bank
assets plus stock
market capitalization as share of GDP, averages over 1980-95.
Measure
Religion Variables
at
al
(2003a); data from the
http://\vww. worldbank.org/research/bios/lbeck/LPF.xls
Beck, Demirgu^-Kunt, and Levine (2001). Data from Ihe
web at
http://www.woridbank.org/research/projects/finstiuctute/database.htm
Percentage of the population that belonged
religions;
Roman Catholic,
Protestant,
in
1
980 (or for 1 990-95 for countries formed more recently) to the following
Muslim, and "other".
La
Porta, Lopez-de-Silanes, Shleifer,
and Vishny (1999)
Description
Variable
Absolute value of the latitude of the country, scaled to lake values between Oand
Latitude
Log
Log of average annual
Inflation
inHation in the
Consumer
Source
1.
where
is
La
the equator
Porta. Lopez-de-Si lanes, Shleifer,
World Bank. World Development
Price Index from 1970 to 1998,
and Vishny {1999}
Indicators,
CD-Rom,
1999, as used in Acemoglu.
Johnson. Robinson, and Thaicharoen (200?)
linglish Legal Origin (or
Common Law
countries)
Coded zero or one One
indicates that country
was colonized by Bhiain and English
legal
code was transferred
La
Porta, Lopez-de-Si lanes, Shleifer,
and Vishny (1999), and Djankov, La Porta,
Lopcz-de-Si lanes, and Shleifer (2003).
French Legal Origin (or Civil
Log
Sclllei Mortality
Law
countries)
Coded zero or one. One indicates
legal code was transferred.
Log of estimated monalily
mortality
is
for
that country
European
was colonized by France, Spain, Belgium, Portugal or Germany and French
La
Porta,
Lopez -de-Si lanes.
Shleifer.
and Vishny (1999), and Djankov, La Porta,
Lopcz-de-Silanes, and Shleifer (2003)
settlers
during the early period of European colonization (before 1850). Settler
calculated from the mortality rates of
European-bom
soldiers, sudors
and bishops when stationed
in colonies.
Acemoglu, Johnson, and Robinson (2001), based on Cunin (1989) and other sources.
It
measures the effects of local diseases on people without inhenled or acquired immunities.
Log Population Density
Log of population
density in 1500. population density
is
inhabitants per square kilometer,
Acemoglu. Johnson, and Robinson (2002), based on McEvedy and Jones (1978)
Table
A2
Contracting vs. Property Rights Institutions: Econoinic Growth, 1970-95
(1)
(3)
(2)
(4)
Dependent variable
2SLS, with
2SLS, with
2SLS, with
Against Risk of
Risk of
Constraint on
Constraint on
&
Expropriation
Check Measure
0.64
1.00
0.59
0.99
(0.20)
(0.32)
(0.22)
(0.38)
OLS
OLS or
&
Exec.
OLS
Eviction Measure
Second Stage Regression, with log
Constraint on Executive
in
0.11
0.25
-0.21
-0.05
(0.25)
(0.36)
(0.22)
(0.38)
0.07
0.19
47
40
OLS
47
40
0.79
0.25
0.75
0.37
(0.21)
(0.53)
(0.23)
(0.42)
1
results. In
in
-0.41
(0.29)
columns
0.29
-0.10
-0.10
-0.22
(0.27)
(0.39)
(0.25)
(0.33)
45
45
1970 to 1995, from the World Bank (2003)
2, 4, 6,
and 8 the instruments
The measure of legal
WDl CD-Rom.
in
1
500.
we
45
54
use only the excolonies sample.
The measure of institutions used
both Panels, a
The dependent
variable
is
as an independent variable
measure" from Djankov, La Porta, Lopez-de-Silanes, and Shieifer (2003). In columns
are: in
45
is:
in
in
dummy
1, 3,
5,
and 7
variable for whether a coimtry has an English legal origin, as classified
Lopez-de-Silanes, and Shieifer (2003) and Djankov (2003); in Panel A, log settler mortality before
Panel B, log population density
54
Acemoglu, Johnson, and Robinson (2001); in columns 5 through 8, constraint on the
formalism used as an independent variable is: in columns 1-2 and 5-6, the "check measure", from
average protection against the risk of expropriation as used
7-8, the "eviction
0.01
0.02
0.21
52
regressions are cross-sectional with one observation per country;
GDP per capita from
columns 3-4 and
0.21
(0.42)
-0.23
executive, averaged over the 1990s, from Polity IV.
Djankov (2003);
0.06
(0.16)
(0.21)
0.27
4,
0.09
(0.44)
-0.30
in parentheses. All
39
0.04
(0.42)
52
39
(0.15)
0.11
OLS
through
47
(0.22)
Number of Observations
columns
0.03
or Second Stage Regression, with log population dens ity as instrument
Legal Formalism (Eviction Measure)
Standard errors are
0.68
(0.38)
-0.10
Legal Formalism (Check Measure)
average annual growth in
-0.05
(0.15)
(0.41)
Constraint on Executive
in
1.00
-0.38
Panel B:
instrument
(0.52)
(0.20)
47
& Eviction
Measure
-0.07
0.13
0.29
Exec.
OLS
(0.15)
(0.31)
Number of Observations
R-squared
settler mortality as
-0.08
OLS
Average Protection Against
Risk of Expropriation
& Check
Measure
(0.21)
Legal Formalism (Eviction Measure)
R-squared
(8)
1970-95
Protection Against
OLS
Legal Formalism (Check Measure)
capita.
Protection
Panel A;
Risk of Expropriation
(7)
(6)
2SLS, with
Expropriation
Average Protection Against
(5)
annual average growth rate of GDP per
is
1
850 (where mortality
is
per 1000 per
armum with
we
report
OLS
by Djankov, La
Porta,
replacement); and in
A3
Table
Regressions with Reduced
(1)
12)
(3)
Form
(4)
for Origin
and IV for Property Rights Institutions
161
(5)
(71
Dependent vanablc indicated
Log
QDP
per capita in
Investmenl-
GDP ratio
in
Credit to the
Market
Log number
pnvate sector
capitalization
procedures for
as pertent of
as percent of
GDP
Cost
at the
if registering a
I
GDP
new business
(percerntofGDPper
per capita in
business
capita)
1995
new
registering a
m
(8)
Log
(10)
(II)
(12)
Cost of registering a
top of"each column
Investment-
GDP
ratio in
Credit to the
Market
Log number
pnvate sector
capitalization
procedures for
as percent of
as percent of
GDP
GDP
regisienng a
new
new business
(percent of
GDP per
1995
1990s
GDP
1,20
6,02
039
0,3
-024
-0.45
1.08
5.55
0.28
0.24
-0.27
-0 31
(010)
(009)
(0,06)
(0.15)
(0.23)
(1-41)
(0.08)
(0.09)
(0.08)
(0.19)
1990s
business
capita)
Second Stage Regression
Average Protection
Against Risic of Expropriation
Englisli Legal Origin
(024)
(1
39)
-0 91
-3,16
-0,13
-0,32
0.05
-083
-2.67
-0.06
0.03
-0.27
-0 19
(0.38)
(2,36)
(0 16)
(0 15)
(0,14)
(0.32)
(0.34)
(2.18)
(0.12)
(0.13)
(0.14)
(0.31)
0.76
0,73
0,70
0,81
053
0.53
090
0.90
0.87
098
083
0.83
(0.32)
(0,33)
(0,32)
(033)
(0,32)
(0.32)
(029)
(0.30)
(0.29)
(0.31)
(032)
(0.32)
01
First Stage for Proteclior1
English Legal Origin
Log
Settler Mortality
-0.49
-0,54
•0,48
-0,54
072
-0.72
(0 13)
(0,13)
(0 13)
(0,13)
(0,12)
(0.12)
Against Expropriation
Log Population Density
R-Sqnared
in First
Stage
Number of Observations
Standard errors are
in
0.27
0,32
0,28
030
0,51
65
65
66
63
48
parentheses All regressions are two stage least squares, cross -sectional data with one obser\'aiion per country;
1995; in columns 2 and 8. investmenl-GDP ratio; in columns 3 and
register a business; in
51
48
columns 6 and
12. the cost
9, credit to the
pnvate sector as share of GDP.
Djankov, La Porta. Lopez -de-Si lanes, and Shleifer (2003) and Djankov (2003) The instruments
12, log population density in 1500.
in
columns 4 and
of registering a business as a percent of GDP per capita. Sources are as
arc: in
columns
1
in
through
we
-0 34
-0,36
-0.34
-0.34
-036
-0.36
(0.09)
(0.09)
(0.09)
(0.09)
(0.09)
(0.09)
0.28
0.27
0.28
0.28
0.32
0.35
71
71
72
69
54
use only the excolonies sample
10. stock
The dependent
market capitalization as share of GDP,
previous tables. All columns have a
6. log settler mortality
dummy
in
columns
variables are in
columns
5
and
1
1
,
the log
I
and
54
7,
log
GDP per capita
numberof procedures required
in
to
variable for whether a country has an linglish legal origin, as classified by
before 1850 {where morlalily
is
per 1000 per
annum
with replacement), and
in
columns 7 through
Table
Contracting vs. Property Rights Institutions:
(2)
(1)
A4
GDP per capita, with alternative instrument
(3)
(5)
(4)
Dependent variable
is
log
GDP per capita
2SLS, with
2SLS, with Protect
Protect Against
Exprop.
& Check
Against Exprop.
OLS
Measure
OLS
0.64
1.09
0.64
0.97
(0.08)
(0.22)
(0.09)
(0.18)
OLS
Average Protection
Against Risk of Expropriation
&
in
OLS
R-Squared
1
(0.21)
500
in First Stage
GDP per capita (PPP
(0.24)
0.87
0.59
(0.30)
7-8, the "eviction
are: a
0.05
-0.26
(0.43)
(0.47)
-0.36
-0.38
-0.40
-0.40
(0.08)
(0.13)
(0.13)
0.37
0.15
0.16
Stage for Measure of Legal Formalism (Check or Eviction Measure)
-1.95
-1.64
-1.74
-1.59
(0.22)
(0.21)
(0.21)
(0.21)
0.07
-0.01
0.04
-0.02
(0.06)
(0.06)
(0.06)
(0.06)
0.57
49
57
in parentheses. All regressions are cross-sectional
and 8 the instruments
0.31
(0.09)
57
adjusted) in 1995, from the
0.27
(0.30)
World Bank's
in
WDI
60
we
50
50
60
use only the excolonies sample. The dependent variable
on-hne. The measure of institutions used as an independent variable
is:
in
columns
1
through
is
log
4,
in columns 5 through 8, constraint on the executive, averaged over
columns 1-2 and 5-6, the "check measure", from Djankov (2003); in
Acemoglu, Johnson, and Robinson (2001);
is:
in
measure" from Djankov, La Porta, Lopez-de-Silanes, and Shleifer (2003). In columns 1,3,5, and 7
dummy
0.54
0.57
49
with one observation per country;
from Polity IV. The measure of legal formalism used as an independent variable
columns 3-4 and
4, 6,
-0.004
Stage for Measure of Institutions (Protect. Against Expropriation or Constraint on Executive)
average protection against the risk of expropriation as used
the 1990s,
-0.05
(0.11)
0.62
Number of Observations
Standard errors are
0.45
(0.16)
0.52
English Legal Origin
R-Squared
0.28
(0.11)
0.35
1
0.88
(0.27)
-0.002
First
in
0.31
(0.07)
-0.13
in First Stage
Log Population Density
0.88
(0.27)
(0.10)
500
Eviction
Measure
0.29
0.44
English Legal Origin
&
Exec.
OLS
(0.07)
(0.18)
First
in
& Check
Measure
0.15
0.55
Log Population Density
2SLS, with
Constraint on
(0.09)
Legal Formalism (Eviction Measure)
R-Squared
2SLS, with
Constraint on
or Second Sta ge Regression
Constraint on Executive
Legal Formalism (Check Measure)
(8)
1995
Exec.
OLS
Eviction Measure
(7)
(6)
in
we
report
OLS
results. In
columns
variable for whether a country has an English legal origin, as classified by Djankov, La Porta, Lopez-de-Silanes, and Shleifer
(2003) and Djankov (2003); and log population density in 1500 from Acemoglu, Johnson, and Robinson (2002).
2,
Table
A5
Contracting vs. Property Rights Institutions: Investment-GDP ratio, with alternative instrument
(1)
(2)
(4)
(3)
Dependent variable
2SLS, with
2SLS, with
2SLS, with
Constraint on
Constraint on
&
Exprop.
OLS
3.81
5.80
4.07
4.48
(0.63)
(1.50)
(0.70)
(1.26)
&
Eviction Measure
or
OLS
R-Squarcd
in First
in
1
-1.34
(1.37)
R-Squared
in First
the investment to
500
columns
1
through
4,
-0.54
-1.42
(0.93)
(1.78)
0.09
1500
0.59
0.05
-0.26
(0.30)
(0.43)
(0.47)
-0.36
-0.38
-0.40
-0.40
(0.09)
(0.08)
(0.13)
(0.13)
0.37
0.15
0.16
Measure of Legal Formalism (Check or Eviction Measure)
-1.95
-1.64
-1.74
-1.59
(0.22)
(0.21)
(0.21)
(0.21)
0.07
-0.01
0.04
-0.02
(0.06)
(0.06)
(0.06)
(0.06)
0.57
49
57
49
regressions arc cross-sectional with one observation per country;
ratio, in current prices,
on Executive)
(0.30)
0.62
57
(
0.06
Protect. Against Expropriation or Constraint
0.87
0.35
in parentheses. All
GDP
1.10
(1.18)
0.43
Stage
Standard errors are
1.38
(0.81)
Stage for Measure of Institutions
English Legal Origin
Number of Observations
4.82
(2.02)
-0.94
First Stage for
in
0.94
(0.57)
(0.76)
Stage
Log Population Density
4.24
(1.77)
1.27
English Legal Origin
& Eviction
Measure
1.00
(1.21)
First
Exec.
OLS
(0.51)
0.71
0.43
Log Population Density
& Check
Measure
(0.68)
Legal Formalism (Eviction Measure)
in
Exec.
OLS
Second S tagc Regression
Constraint on Executive
R-squared
1990s
Protect Against
OLS
Legal Formalism (Check Measure)
(8)
(7)
GDP in
2SLS, with
Exprop.
Against Risk of Expropriation
(6)
to
Protect Against
Check Measure
OLS
Average Protection
(5)
average ratio of investment
is
average over
1
0,54
0.57
60
we
60
50
50
use only the excolonies sample. The dependent variable
World Tables 6.1. The measure of institutions used as an independent variable is: in
used in Accmoglu, Johnson, and Robinson (2001); in columns 5 through 8, constraint on
is
990s, from Penn
average protection against the risk of expropriation as
the
The measure of legal formalism used as an independent variable is: in columns 1-2 and 5-6, the "check measure",
from Djankov (2003); in columns 3-4 and 7-8, the "eviction measure" from Djankov, La Porta, Lopez-de-Silancs, and Shieifer (2003). In columns 1, 3, 5, and 7 we
report OLS results. In columns 2, 4, 6, and 8 the instruments are: dummy variable for whether a country has an English legal origin, as classified by Djankov, La Porta,
executive, averaged over the 1990s, from Polity IV.
Lopez-de-Silanes, and Shieifer (2003) and Djankov (2003); and log population density in 1500.
Table
A6
Contracting vs. Property Rights Institutions: Private Credit, with ahemative instrument
(3)
(2)
(1)
(4)
Dependent variable
is
(5)
credit to the private sector in
2SLS, with Protect
&
Exprop.
Against Exprop.
OLS
Check Measure
OLS
0.13
0.25
0.18
0.24
(0.04)
(0.09)
(0.04)
(0.08)
OLS
Average Protection
Against Risk of Expropriation
&
or Second
in
OLS
R-Squared
1
-0.08
in First
0.002
-0.02
-0.08
-0.10
(0.05)
(0.07)
(0.05)
(0.07)
0.30
500
500
Stage
0.87
0.59
0.05
-0.26
(0.30)
(0.43)
(0.47)
-0.36
-0.38
-0.40
-0.40
(0.09)
(0.08)
(0.13)
(0.13)
0.15
0.16
0.37
Measure of Legal Formalism (Check or Eviction Measure)
-1.95
-1.64
-1.74
-1.59
(0.22)
(0.21)
(0.21)
(0.21)
0.07
-0.01
0.04
-0.02
(0.06)
(0.06)
(0.06)
(0.06)
0.57
49
57
57
of GDP
in
1998, from the
60
we
60
as an independent variable
average protection against the risk of expropriation as used in Acemoglu, Johnson, and Robinson (2001); and in columns 5 through
columns 3-4 and
4, 6,
7-8, the "eviction
and 8 the instruments
are: a
is:
in
columns
1-2
and Djankov (2003); and log population density
for
in
1
whether
a country has
8,
is:
The dependent
in
constraint
variable
columns 4 through
is
8,
on the executive, averaged
and 5-6, the "check measure", from Djankov (2003); in
measure" from Djankov, La Porta, Lopez-de-Silanes, and Shleifer (2003). In columns
dummy variable
50
50
use only the excolonies sample.
World Bank. The measure of institutions used
over the 1990s, from Polity IV. The measure of legal formalism used as an independent variable
0.54
0.57
49
Standard errors are in parentheses. All regressions are cross-sectional with one observation per country;
credit to the private sector as a percent
0.13
(0.30)
0.62
Number of Observations
0.23
Stage for Measure of Institutions (Protect. Against Expropriation or Constraint on Executive)
English Legal Origin
R-Squared
0.18
(0.08)
(0.06)
First Stage for
1
0.06
(0.03)
-0.11
0.35
in
0.17
(0.07)
(0.04)
in First Stage
Log Population Density
0.06
0.01
English Legal Origin
in
& Eviction
Measure
(0.02)
(0.07)
First
Exec.
OLS
Regression
Stiage
-0.08
0.36
Log Population Density
& Check
Measure
(0.04)
Legal Formalism (Eviction Measure)
R-squared
2SLS, with
Constraint on
Exec.
Constraint on Executive
Legal Formalism (Check Measure)
2SLS, with
Constraint on
OLS
Eviction Measure
(8)
1998 as a percent of GDP
2SLS, with
Protect Against
(V)
(6)
1,
3, 5,
and 7
we
report
OLS
results. In
columns
2,
an English legal origin, as classified by Djankov, La Porta, Lopez-de-Silanes, and Shleifer (2003
500 from Acemoglu, Johnson, and Robinson (2002).
Table
A7
Contracting vs. Property Rights Institutions: Stock Market Capitalization, with alternative instrument
(2)
(1)
(3)
Dependent variable
is
Against Risk of Expropriation
2SLS, with
2SLS,with
2SLS,with
Protect Against
Constraint on
Constraint on
&
Exprop.
OLS
Check Measure
0.10
0.21
(0.04)
(0.09)
&
Eviction Measure
in
OLS
0.22
(0.05)
(0.09)
R-Squared
in First
in First
1500
Stage
Number of Observations
-0.03
-0.11
-0.09
-0.17
(0.08)
(0.05)
(0.08)
0.26
Measure of Institutions
(Protect. Against Expropriation or Constraint
the level of stock market capitalization as a percent of
1
through
4,
0.02
-0.31
(0.31)
(0.30)
(0.44)
(0.47)
-0.37
-0.38
-0.39
-0.38
(0.09)
(0.08)
(0.13)
(0.13)
0.37
0.14
0.16
Stage for Measure of Legal Formalism Check or Evict ion Measure)
-1.99
-1.71
-1.78
-1.65
(0.21)
(0.20)
(0.20)
(0.20)
0.08
0.008
0.05
-0.006
(0.06)
(0.06)
(0.06)
(0.06)
0.64
0.62
0.59
48
48
59
GDP
in
1990-95, from Beck
et al (2003).
we
The measure of institutions used
report
OLS
results.
Porta, Lopez-de-Silanes,
In
in
columns 3-4 and
columns
2, 4, 6,
7-8, the "eviction
and 8 the instruments
49
as an independent variable
average protection against the risk of expropriation as used in .^cemoglu, Johnson, and Robinson (2001); and
measure", from Djankov (2003);
we
0.59
49
59
use only the excolonies sample. The dependent variable
on the executive, averaged over the 1990s, from Polity IV. The measure of legal formalism used as an independent variable
7
on Executive)
0.60
56
56
0.10
0.89
Standard errors are in parentheses. All regressions are cross-sectional with one observation per country;
columns
0.15
(0.09)
(0.06)
0.24
English Legal Origin
R- Squared
0.05
(0.03)
-0.14
0.36
in
0.13
(0.07)
(0.05)
First
Log Population Density
0.04
-0.15
Stage
Eviction
Measure
(0.03)
(0.04)
500
&
Exec.
OLS
or Second Stage Regression
0.17
-0.08
First Stage for
1
Check
(0.07)
English Legal Origin
in
&
Measure
-0.13
0.38
Log Population Density
Exec.
OLS
(0.04)
Legal Formalism (Eviction Measure)
R-squared
ofGDP
2SLS, with
Constraint on Executive
Legal Formalism (Check Measure)
(8)
(7)
slock market capitali -Mtion, average 1990-95. as a percent
OLS
Average Protection
(6)
Protect Against
Exprop.
OLS
(5)
(4)
is:
in
in
columns 5 through
columns
1-2
is:
8, constraint
and 5-6, the "check
measure" from Djankov, La Porta, Lopez-de-Silanes, and Shleifer (2003). In columns
are; a
dummy
1, 3, 5,
variable for whether a country has an English legal origin, as classified by Djankov,
and Shleifer (2003) and Djankov (2003); and log population density
in
is
in
1500 from Acemoglu, Johnson, and Robinson (2002).
and
La
Figure
1
Credit market collapses;
C^
Legal
costs of
higher P does not affect
.C\P)
investment
contract
C^
enforcement
investment only
affects
when
cross from one
region to the other
Credit market exists;
higher P increases
investment
Political constraints,
P
Figure 2
GMB
NZL
USA
CAN
USA
CAN
NZL SGP
SGP
AUS
GAB
GAB
IDN
«*
TO
AUS
iND
GMB
CMR
JAM
<="*
HttOc
PNG
KEN
g6f
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miR
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CUR
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GIN
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Residuals from Regressing Log Settler Mort. on Eng. Leg. Orig.
5
Residuals from Regressing Eng, Leg,
Ohg on Log
Settler Mort.
-
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Residuals from Regressing Log, Sett. Mort on Eng. Leg.
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Residuals from Regressing Eng. Leg.
Ong on
Log. Sett.
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NGA
Figure 3
4PNG
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2 -
JAM
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Residuals from Regressing Log Settler Mort- on Eng. Leg. Orig.
.5
Residuals from Regressing Eng. Leg. Orig. on Log Settler Mod,
2 -
PWJ
Gt*N
LKA
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PAWfJ^
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Residuals from Regressing Log. Sett. Mort. on Eng. Leg. Orig
1
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Residuals from Regressing Eng. Leg. Orig on Log. Sett. Mort.
Figure 4
USA
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a:
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"1
-2
Residuals from Reg. Log
Pop Density
in
2
1500 on Eng. Leg. Ong.
1
1
-.5
.5
Residuals from Regressing Eng. Leg. Ong. on Log Pop. Density
in
O
a
ABG SWAN
BWA
"^V
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swz
m ™
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-2
Residuals from Regressing Log. Pop. Density
2
In
1500 on Eng. Leg. Ong
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Res. from Reg. Eng. Leg. Orig on Log. Pop. Density
in
1500
1500
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1 1 2003
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