Financial Development <---> Property Rights

There is a consensus that stronger property rights advance financial development. We provide evidence that the reverse hypothesis is also true. We isolate the structural component in the finance–property rights relationship using an instrument for financial development (private credit) based on an index of exposure to foreign crises, in addition to generalized method of moments approaches for panel data. Our results suggest a one standard deviation increase in private credit from its average in 2005 translates into a 0.5- to 1.0-point increase in property rights. To contextualize this, the difference in property rights between Israel and Uruguay, two countries separated by about one standard deviation in the volume of private credit, was 0.67 points.

Source. (Gated)