Financial Liberalization, Limited Contract Enforcement and Productivity

Saygili Meryem ()
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Saygili Meryem: Economics Division, Department of Social Sciences, The University of Texas at Tyler, Tyler, TX, USA

Journal of Globalization and Development, 2013, vol. 4, issue 1, 95-130

Abstract: This paper investigates whether opening up to international financial flows improves aggregate productivity in the presence of limited contract enforceability. I present a model of two countries that differ in terms of the degree of contract enforcement and analyze the consequences of financial market integration among them. I then test the predictions of the model empirically. The model predicts that aggregate productivity improves after financial integration, in economies with strong contract enforcement, while it deteriorates in countries with weak enforcement. The empirical analysis confirms the effect of capital account liberalization depends on the strength of contract enforcement.

Date: 2013
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DOI: 10.1515/jgd-2012-0008

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