Investor Protection, Optimal Incentives, and Economic Growth

Rui Castro, Gian Luca Clementi and Glenn MacDonald

The Quarterly Journal of Economics, 2004, vol. 119, issue 3, 1131-1175

Abstract: Does investor protection foster economic growth? To assess the widely held affirmative view, we introduce investor protection into a standard overlapping generations model of capital accumulation. Better investor protection implies better risk sharing. Because of entrepreneurs' risk aversion, this results in a larger demand for capital. This is the demand effect. A second effect (the supply effect) follows from general equilibrium restrictions. Better protection (i.e., higher demand) increases the interest rate and lowers the income of entrepreneurs, decreasing current savings and next period's supply of capital. The supply effect is stronger the tighter are the restrictions on capital flows. Our model thus predicts that the (positive) effect of investor protection on growth is stronger for countries with lower restrictions. Cross-country data provide support for this prediction, as does the detailed examination of the growth experiences of South Korea and India.

Date: 2004
References: Add references at CitEc
Citations: View citations in EconPapers (154)

Downloads: (external link)
http://hdl.handle.net/10.1162/0033553041502171 (application/pdf)
Access to full text is restricted to subscribers.

Related works:
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: https://EconPapers.repec.org/RePEc:oup:qjecon:v:119:y:2004:i:3:p:1131-1175.

Ordering information: This journal article can be ordered from
https://academic.oup.com/journals

Access Statistics for this article

The Quarterly Journal of Economics is currently edited by Robert J. Barro, Lawrence F. Katz, Nathan Nunn, Andrei Shleifer and Stefanie Stantcheva

More articles in The Quarterly Journal of Economics from President and Fellows of Harvard College
Bibliographic data for series maintained by Oxford University Press ().