In developing countries, informal firms account for up to about half of all economic activity. Using data from World Bank firm-level surveys, we find that informal firms are small and extremely unproductive compared with even the small formal firms in the sample, and especially relative to the larger formal firms. Formal firms are run by much better educated managers than informal ones and use more capital, have different customers, market their products, and use more external finance. Few formal firms have ever operated informally. This evidence supports the dual economy (“Wal-Mart”) theory of development, in which growth comes about from the creation of highly productive formal firms. Informal firms keep millions of people alive but disappear as the economy develops.
Insolvency practitioners from 88 countries describe how debt enforcement will proceed against an identical hotel about to default on its debt. We use the data on time, cost, and the likely disposition of the assets (preservation as a going concern vs. piecemeal sale) to construct a measure of the efficiency of debt enforcement in each country. This measure is strongly correlated with per capita income and legal origin and predicts debt market development. Several characteristics of debt enforcement procedures, such as the structure of appeals and avail- ability of floating charge finance, influence efficiency.
We present a new measure of legal protection of minority shareholders against expropriation by corporate insiders: the anti-self-dealing index. Assembled with the help of Lex Mundi law firms, the index is calculated for 72 countries based on legal rules prevailing in 2003, and focuses on private enforcement mechanisms, such as disclosure, approval, and litigation, that govern a specific self-dealing transaction. This theoretically grounded index predicts a variety of stock market outcomes, and generally works better than the previously introduced index of anti-director rights.
Copyright 2008 Elsevier B.V. All rights reserved.
In the last decade, economists have produced a considerable body of research suggesting that the historical origin of a country’s laws is highly correlated with a broad range of its legal rules and regulations, as well as with economic outcomes. We summarize this evidence and attempt a unified interpretation. We also address several objections to the empirical claim that legal origins matter. Finally, we assess the implications of this research for economic reform.
We present a model of uninformative persuasion in which individuals “think coarsely”: they group situations into categories, and apply the same model of inference to all situations within a category. Coarse thinking exhibits two features that persuaders take advantage of: (i) transference, whereby individuals transfer the informational content of a given message from situations in a category where it is useful to those where it is not, and (ii) framing, whereby objectively useless information influences individuals’ choice of category. The model sheds light on uninformative advertising and product branding, as well as on some otherwise anomalous evidence on mutual fund advertising.
Following legal realists, we model the causes and consequences of trial judges exercising discretion in finding facts in a trial. We identify two motivations for the exercise of such discretion: judicial policy preferences and judges’ aversion to reversal on appeal when the law is unsettled. In the latter case, judges exercising fact discretion find the facts that fit the settled precedents, even when they have no policy preferences. In a standard model of a tort, judicial fact discretion leads to setting of damages unpredictable from true facts of the case but predictable from knowledge of judicial preferences, distorts the number and severity of accidents, and generates welfare losses. It also encourages litigants to take extreme positions in court and raises the incidence of litigation relative to settlement, especially in new and complex disputes for which the law is unsettled.
Across countries, education and democracy are highly correlated. We motivate empirically and then model a causal mechanism explaining this correlation. In our model, schooling teaches people to interact with others and raises the benefits of civic participation, including voting and organizing. In the battle between democracy and dictatorship, democracy has a wide potential base of support but offers weak incentives to its defenders. Dictatorship provides stronger incentives to a narrower base. As education raises the benefits of civic engagement, it raises participation in support of a broad-based regime (democracy) relative to that in support of a narrow-based regime (dictatorship). This increases the likelihood of successful democratic revolutions against dictatorships, and reduces that of successful anti-democratic coups.
We investigate the evolution of common law under overruling, a system of precedent change in which appellate courts replace existing legal rules with new ones. We use a legal realist model, in which judges change the law to reflect their own preferences or attitudes, but changing the law is costly to them. The model’s predictions are consistent with the empirical evidence on the overruling behavior of the US Supreme Court and appellate courts. We find that overruling leads to unstable legal rules that rarely converge to efficiency. The selection of disputes for litigation does not change this conclusion. Our findings provide a rationale for the value of precedent, as well as for the general preference of appellate courts for distinguishing rather than overruling as a law-making strategy. Journal of Comparative Economics 35 (2) (2007) 309–328. University of Stockholm, 10691 Stockholm, Sweden; Harvard University, M9 Littauer Center, Cambridge, MA 02138, USA.
© 2007 Association for Comparative Economic Studies. Published by Elsevier Inc. All rights reserved.
We investigate cross-country determinants of private credit, using new data on legal creditor rights and private and public credit registries in 129 countries. Both creditor protection through the legal system and information-sharing institutions are associated with higher ratios of private credit to gross domestic product, but the former is relatively more important in the richer countries. An analysis of legal reforms shows that credit rises after improvements in creditor rights and in information sharing. Creditor rights are remarkably stable over time, contrary to the hypothesis that legal rules are converging. Finally, legal origins are an important determinant of both creditor rights and information- sharing institutions. The analysis suggests that public credit registries, which are primarily a feature of French civil law countries, benefit private credit markets in developing countries. Copyright 2006 Elsevier B.V. All rights reserved.