Legal Institutions, Sectoral Heterogeneity, and Economic Development

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Legal Institutions, Sectoral Heterogeneity, and Economic Development

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RUI CASTRO
GIAN LUCA CLEMENTI
GLENN MACDONALD

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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. Copyright © 2009 The Review of Economic Studies Limited.

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Article provided by Blackwell Publishing in its journal Review of Economic Studies.

Volume (Year): 76 (2009)
Issue (Month): 2 (04)
Pages: 529-561
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Handle: RePEc:bla:restud:v:76:y:2009:i:2:p:529-561

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Paper
- Rui Castro & Gian Luca Clementi & Glenn MacDonald, 2004. "Legal Institutions, Sectoral Heterogeneity, and Economic Development," 2004 Meeting Papers 162, Society for Economic Dynamics.
- Rui Castro & Gian Luca Clementi & Glenn McDonald, 2007. "Legal Institutions, Sectoral Heterogeneity, and Economic Development," Working Paper Series 05-07, Rimini Centre for Economic Analysis, revised Jul 2007. [Downloadable!]

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Alessio Moro, 2008. "Biased Technical Change, Intermediate Goods and Total Factor Productivity," Economics Working Papers we076034, Universidad Carlos III, Departamento de Economía. [Downloadable!]
Nezih Guner & Gustavo Ventura & Xu Yi, 2008. "Macroeconomic Implications of Size-Dependent Policies," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 11(4), pages 721-744, October. [Downloadable!] (restricted)
Other versions:
- Guner, Nezih & Ventura, Gustavo & Xu, Yi, 2007. "Macroeconomic Implications of Size-Dependent Policies," CEPR Discussion Papers 6138, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
- Xu Yi & Nezih Guner & Gustavo Ventura, 2005. "Macroeconomic Implications of Size Dependent Policies," 2005 Meeting Papers 530, Society for Economic Dynamics. [Downloadable!]
- Nezih Guner & Gustavo Ventura & Xu Yi, 2008. "Code for "Macroeconomic Implications of Size-Dependent Policies"," Computer Codes 07-73, Review of Economic Dynamics. [Downloadable!]
Andres Erosa & Ana Hidalgo, 2007. "On Finance as a Theory of TFP, Cross-Industry Productivity Differences, and Economic Rents," Working Papers tecipa-285, University of Toronto, Department of Economics. [Downloadable!]
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- Andrés Erosa & Ana Hidalgo Cabrillana, 2008. "On Finance As A Theory Of Tfp, Cross-Industry Productivity Differences, And Economic Rents," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 49(2), pages 437-473, 05. [Downloadable!] (restricted)
Mei Li, 2007. "Coordination Failure in Technological Progress, Economic Growth and Volatility," Working Papers 1147, Queen's University, Department of Economics. [Downloadable!]
Andres Erosa & Ana Hidalgo, 2005. "On Capital Market Imperfections as a Source of Low TFP and Economic Rents," Working Papers tecipa-200, University of Toronto, Department of Economics. [Downloadable!]

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