infonet-economy

This paper endeavours to determine in how far theories emphasising cultural values, dysfunctional institutions or impediments to trade can explain the vast differences in the size of financial systems across the globe. To account for endogeneity, an instrumental variables approach is pursued. For a cross-section of countries, we find that trade openness and institutions constraining the political elite from expropriating financiers tend to promote financial development. Conversely, there is only limited evidence that cultural beliefs and the cost of enforcing financial contracts significantly hamper financial development.