How does Investors' Legal Protection affect Productivity and Growth?

Binyamin Berdugo () and Sharon Hadad
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Binyamin Berdugo: Department of Economics, Ben-Gurion University of the Negev
Sharon Hadad: Ben-Gurion University of the Negev

No 908, Working Papers from Ben-Gurion University of the Negev, Department of Economics

Abstract: This paper analyzes the implications of investors' legal protection on aggregate productivity and growth. We have two main results. First, that better investors' legal protection can mitigate agency problems between investors and innovators and therefore expand the range of high-tech projects that can be financed by non-bank investors. Second, investors' legal protection shifts investment resources from less productive (medium-tech) to highly productive (high-tech) projects and therefore enhances economic growth. These results stem from two forces. On one hand, private investors' moral hazard problems (in which entrepreneurs shift investors' resources to their own benefit), and on the other hand innovators' risk of project termination by banks due to wrong signals about projects' probability of success. Our results are consistent with recent empirical studies that show a high correlation between legal investors' protection and the structure of the financial system as well as the economic performance at industry and macroeconomic levels.

Pages: 38 pages
Date: 2009
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Persistent link: https://EconPapers.repec.org/RePEc:bgu:wpaper:0908

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