The Differential Impact of Legal Origins on Firm Productivity

This paper examines the differential impact of legal origins on the distribution of firm-level total factor productivity (TFP) using a novel grouped-quantile treatment model with group-level unobservable characteristics. Using firm-level data across 51 countries from the World Bank Enterprise Survey, we find that firm-level TFP is higher on average in countries with common-law systems, especially in low-income countries. This impact is not uniform across the TFP distribution, with stronger impacts among high-productivity firms. Given the relatively low levels of international competitiveness among firms in low-income countries, this finding has important implications for their capability to break into export markets and create high-quality jobs. For the possible mechanisms of how legal origins affect firms’ TFP, we find that common-law countries have lower business obstacles as reflected in more favorable legal rules and regulations for access to finance, less corruption, less crime, less informality, and better tax administration.