Law, Finance, Economic Growth and Welfare: Why Does Legal Origin Matter?
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Abstract
This paper proposes four theories on why legal origin influences growth and welfare through fnance. This article provides empirical validation on these theories. It is a natural extension of “Law and fnance: why does legal origin matter?†by Thorsten Beck, Asli Demirgüç-Kunt and Ross Levine (2003). We fnd only partial support for the Mundell (1972), La Porta et al. (1998) and Beck et al. (2003) hypotheses that countries which have adopted or adapted the British common law system (a British colonial legacy) tend to have better developed fnancial intermediaries than countries which adopted the French legal system or civil law. Common law systems have evolved over the ages and are largely based on consensus and precedent while civil law systems are largely based on a code of law. Countries with English legal tradition have legal systems that improve fnancial depth, activity and size while countries which apply French legal system or an adaptation of it overwhelmingly dominate in financial intermediary allocation efficiency. Countries which practise Portuguese legal system fall in-between.
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