Political Instability and Financial Development

27 April 2007 at 10:07 am 1 comment

| Peter Klein |

The latest salvo in the debate over the role of legal origin in financial-market performance comes from Mark Roe. In “Political Instability and Financial Development” (with Jordan Siegel) he argues that political instability is a more important determinant of financial development than trade openness, latitude, and, particularly, legal origin as modeled by LLSV. “Surprisingly, despite the widespread view in the law and finance literature of legal origin’s importance, not only is political stability highly robust to legal origin, but, for many years, our results for key indicators and specifications neither show Common Law to be consistently superior nor French Civil Law to be consistently inferior to other legal families in generating strong financial development outcomes.”

See also my “Politics and Productivity” on the interaction between political institutions, economic freedom, and national economic performance.

Entry filed under: - Klein -, Classical Liberalism, Institutions.

The Market for Organization Equals USD 7.6B The Language of Economists (and Sociologists)

1 Comment Add your own

  • 1. Joseph Wang  |  1 May 2007 at 10:41 am

    I’ve always wondered if people have reversed causality correlation between legal systems and economic development. Because common law requires a functioning court system to exist and civil law can exist independently of a functioning court system, I’m wondering if the causality is economic prosperity -> functioning court system -> legal system.

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