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Please use this identifier to cite or link to this item:
http://hdl.handle.net/2451/25989
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| Title: | Legal Institutions, Sectoral Heterogeneity, and Economic Development |
| Authors: | Castro, Rui
Clementi, Gian Luca
MacDonald, Glenn |
| Keywords: | Macroeconomics
Investment Rate
Overlapping Generations
Rel-ative Prices
Investor Protection
Optimal Contracts |
| Issue Date: | 21-Sep-2006 |
| Series/Report no.: | CLB-06-016 |
| Abstract: | A large body of evidence suggests that poor countries tend to invest
less (have lower PPP-adjusted investment rates) and to face higher
relative prices of in- vestment goods. It has been suggested that this
happens either because these countries have lower TFP in the
investment-good producing sectors, or because they are subject to
greater investment distortions. What is still to be understood, however,
is what are the causes of these shortcomings. In this paper we address
this question by providing a micro-foundation for the cross-country
dispersion in investment distortions. Our analysis rests on two
premises: 1) countries differ with respect to the rights enjoyed by
outside investors (such as bondholders and minority shareholders) and 2)
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
incom-plete, this difference in risk induces a wedge between the returns
on investment in the two sectors. The wedge is bigger, the lower the
investor protection. In turn, this implies that countries endowed with
weaker institutions are poorer, face higher relative prices of
investment goods, and invest a lower fraction of their income. Our
analysis also suggests that the mechanism we study may be quantitatively important. |
| URI: | http://hdl.handle.net/2451/25989 |
| Appears in Collections: | NYU Pollack Center for Law & Business Working Papers
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