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Financial Frictions and the Rule of Law

Ashantha Ranasinghe () and Diego Restuccia ()

No 24546, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Using cross-country micro establishment-level data we document that crime and lack of access to finance are two major obstacles to business operation in poor and developing countries. Using an otherwise standard model of production heterogeneity that integrates institutional differences in the degree of financial development and the rule of law, we quantify the effects of these institutions on aggregate outcomes and economic development. The model accounts for the patterns across establishments in access to finance and crime as obstacles to their operation. Weaker financial development and rule of law have substantial negative effects on aggregate output, reducing output per capita by 50 percent. Weak rule-of-law institutions substantially amplify the negative impact of financial frictions. While financial markets are crucial for development, an essential precondition to reap the gains from financial liberalization is that property rights are secure.

JEL-codes: O1 O11 O4 O43 O5 (search for similar items in EconPapers)
Date: 2018-04
New Economics Papers: this item is included in nep-dge, nep-fdg and nep-ifn
Note: DEV EFG PR
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Published as Ashantha Ranasinghe & Diego Restuccia, 2018. "Financial frictions and the rule of law," Journal of Development Economics, .

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Journal Article: Financial frictions and the rule of law (2018) Downloads
Working Paper: Financial Frictions and the Rule of Law (2018) Downloads
Working Paper: Financial Frictions and the Rule of Law (2016) Downloads
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