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The Quality of the Legal System, Firm Ownership, and Firm Size

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Author Info
Luc Laeven (International Monetary Fund and CEPR)
Christopher Woodruff (Graduate School of International Relations and Pacific Studies, University of California San Diego)

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Abstract

We show that firm size is increasing with the quality of the legal system in Mexico. A 1-standard-deviation improvement in the quality of the legal system is associated with a 0.15-0.30 standard deviation increase in firm size. We also show that the legal system affects firm size by reducing the idiosyncratic risk faced by firm owners. The legal system has a smaller impact on partnerships and corporations than on proprietorships, where risk is concentrated in a single owner. All of the findings are robust to instrumenting for legal quality using historical conditions. By focusing on firms in a single country, the data draw attention to the importance of informal institutions. Copyright by the President and Fellows of Harvard College and the Massachusetts Institute of Technology.

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File URL: http://www.mitpressjournals.org/doi/pdfplus/10.1162/rest.89.4.601
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Publisher Info
Article provided by MIT Press in its journal The Review of Economics and Statistics.

Volume (Year): 89 (2007)
Issue (Month): 4 (07)
Pages: 601-614
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Handle: RePEc:tpr:restat:v:89:y:2007:i:4:p:601-614

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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Rodrigo Canales & Ramana Nanda, 2008. "Bank Structure and the Terms of Lending to Small Businesses," Harvard Business School Working Papers 08-101, Harvard Business School. [Downloadable!]
  2. Berglof, Erik & Claessens, Stijn, 2004. "Enforcement and Corporate Governance," Policy Research Working Paper Series 3409, The World Bank. [Downloadable!]
  3. Zoe Kuehn, 2007. "Tax rates, governance, and the informal economy in high-income countries," Economics Working Papers we078551, Universidad Carlos III, Departamento de Economía. [Downloadable!]
  4. Safavian, Mehnaz & Sharma, Siddharth, 2007. "When do creditor rights work?," Policy Research Working Paper Series 4296, The World Bank. [Downloadable!]
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