Contracts Do Matter: Robust Evidence of an Optimal Level of Legal Formalism in Developing Countries

What is it about?

This paper analyzes the impact of country level factors such as property rights protections, contract enforcement and corruption on household wealth using survey data across 64 developing countries with over one million observations. The analysis shows that contracting institutions, as measured by legal formalism, have a significant and robust impact on household wealth.

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Why is it important?

Most empirical research on institutions finds a large effect of property rights but not contracting institutions, but that work is also mostly at the country level. By analyzing the impact on household wealth I am able to estimate the impacts more cleanly and find a robust significant effect of contracting institutions.