Legal Institutions, Sectoral Heterogeneity, and Economic Development

Rui Luís de Castro (), Gian Luca Clementi () and Glenn Macdonald

Review of Economic Studies, 2009, vol. 76, issue 2, pages 529-561

Abstract: Poor countries have lower PPP-adjusted investment rates and face higher relative prices of investment goods. It has been suggested that this happens either because these countries have a relatively lower TFP in industries producing capital goods or because they are subject to greater investment distortions. This paper provides a micro-foundation for the cross-country dispersion in investment distortions. We first document that firms producing capital goods face a higher level of idiosyncratic risk than their counterparts producing consumption goods. In a model of capital accumulation where the protection of investors' rights is incomplete, this difference in risk induces a wedge between the returns on investment in the two sectors. The wedge is bigger, the poorer the investor protection. In turn, this implies that countries endowed with weaker institutions face higher relative prices of investment goods, invest a lower fraction of their income, and end up being poorer. We find that our mechanism may be quantitatively important. Copyright © 2009 The Review of Economic Studies Limited.

Date: 2009

Downloads: (external link)
http://www.blackwell-synergy.com/doi/abs/10.1111/j.1467-937X.2008.00528.x link to full text (text/html)
Access to full text is restricted to subscribers.

Related works:
Working Paper: Legal Institutions, Sectoral Heterogeneity, and Economic Development (2004)
Working Paper: Legal Institutions, Sectoral Heterogeneity, and Economic Development (2007)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: http://EconPapers.repec.org/RePEc:bla:restud:v:76:y:2009:i:2:p:529-561

Ordering information: This journal article can be ordered from
http://www.blackwell ... bs.asp?ref=0034-6527

Access Statistics for this article

Review of Economic Studies is edited by Andrea Prat, Bruno Biais, Kjetil Storesletten and Enrique Sentana

More articles in Review of Economic Studies from Blackwell Publishing
Series data maintained by Christopher F. Baum ().