DP19387 Legal Institutions and the Development of Financial Systems Revisited
This chapter reviews the finance and law literature, which focuses on the role of legal institutions in shaping financial development. Considerable research finds that (1) in legal systems that enforce private property rights, support private contractual arrangements, and protect investors’ legal rights, savers are more willing to finance firms, and financial markets more efficiently allocate capital, and (2) the different legal traditions that emerged in Europe over previous centuries and were spread internationally through conquest, colonization, and imitation help explain cross-economy differences in investor protection, the contracting environment, and financial development. We discuss alternative explanations of financial development and weigh the evidence.
