EconPapers    
Economics at your fingertips  
 

Legal Institutions, Sectoral Heterogeneity, and Economic Development

Rui Castro, Gian Luca Clementi and Glenn Macdonald

Cahiers de recherche from Universite de Montreal, Departement de sciences economiques

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.

Keywords: Macroeconomics; Investment Rate; Overlapping Generations; Relative Prices; Investor Protection; Optimal Contracts (search for similar items in EconPapers)
JEL-codes: E22 F43 G32 G38 O16 O17 O41 (search for similar items in EconPapers)
Pages: 51 pages
Date: 2009
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (64)

Downloads: (external link)
http://hdl.handle.net/1866/3993 (application/pdf)

Related works:
Journal Article: Legal Institutions, Sectoral Heterogeneity, and Economic Development (2009) Downloads
Working Paper: Legal Institutions, Sectoral Heterogeneity, and Economic Development (2009) Downloads
Working Paper: Legal Institutions, Sectoral Heterogeneity, and Economic Development (2007) Downloads
Working Paper: Legal Institutions, Sectoral Heterogeneity, and Economic Development (2005) Downloads
Working Paper: Legal Institutions, Sectoral Heterogeneity, and Economic Development (2004)
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:mtl:montde:2009-08

Access Statistics for this paper

More papers in Cahiers de recherche from Universite de Montreal, Departement de sciences economiques Contact information at EDIRC.
Bibliographic data for series maintained by Sharon BREWER ().

 
Page updated 2025-03-30
Handle: RePEc:mtl:montde:2009-08