The Efficiency Consequences of Institutional Change: Financial Market Regulation and Industrial Productivity Growth in Brazil, 1866-1934

This paper examines one of the central hypotheses of the New Institutional Economics: that the reform of institutions--the rules and regulations enforced by the State that both permit and bound the operation of markets--is crucial for the process of economic growth. It examines this hypothesis by estimating the productivity gain afforded to Brazilian textile firms by the reform of the regulations governing Brazil's securities markets in 1890. This analysis is based on panel data regressions on 18 firm-level censuses covering the period 1866-1934, which permit me to decompose total factor productivity growth. These censuses cover both limited liability joint stock corporations as well as privately owned firms. I also analyze corporate financial statements and stock market data for publicly held firms covering the period 1895-1940. The paper argues that the reform of the regulations pertaining to limited liability and mandatory disclosure permitted the widespread use of Brazil's debt and equity markets to mobilize capital for industry. This meant that the capital constraints faced by firms prior to the 1890's were relaxed. The result was an increased rate of investment, a decline in industrial concentration, and accelerated rates of growth of productivity.