Financial development and the evolution of property rights and legal institutions

Using a panel of 129 countries over the period from 1965 to 2008, we examine the role of financial development in the evolution of property rights and legal institutions. We postulate that changes in the level of financial development change the costs and benefits of, and the demand for property rights institutions. We predict, and find, a positive causal relationship between the level of financial development and the subsequent quality of property rights institutions, even after we control for country level heterogeneity and reverse causality. Furthermore, our analysis suggests that this relationship is especially strong in emerging market countries. (C) 2012 Elsevier B.V. All rights reserved.