Explaining the effect of financial development on the quality of property rights

Empirical evidence suggests that financial development can catalyze property rights reforms. This paper offers a theory of financial markets to explain these facts defining the relationship. The explanation is based on a simple trade‐off between the costs and the benefits of securing property. Secur...

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Bibliographic Details
Published in:Review of development economics 2019-05, Vol.23 (2), p.957-974
Main Authors: Banerjee, Chandramouli, Bose, Niloy, Rath, Chitralekha
Format: Article
Language:English
Subjects:
Bond markets
Collateral
Economic models
Financial incentives
Loans
Property rights
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Summary:Empirical evidence suggests that financial development can catalyze property rights reforms. This paper offers a theory of financial markets to explain these facts defining the relationship. The explanation is based on a simple trade‐off between the costs and the benefits of securing property. Securing the right to property at a cost allows agents to post collateral against loans. However, the benefits of collateral vary according to the existing credit market conditions, which we take into account in the tradeoff between the costs and the benefits of securing property rights along the path of financial development to explain the conditions under which financial development can create incentives for better property rights institutions.
ISSN:1363-6669
1467-9361
DOI:10.1111/rode.12580