Common Tragedies

Thoughts on Environmental Economics

Exogenous legal institutions as a channel to growth?

Posted by Daniel Hall on January 15, 2009

Most of the empirical literature on the relationship between legal institutions and growth employs cross-country data, but these data may be of limited use in learning how specific rules and laws affect specific paths of development. This paper exploits policy-induced variation in legal institutions across American Indian reservations to study a specific casual mechanism from institutions to growth. The variation is due to federal legislation, implemented during the 1950s and 1960s, that forced some American Indian tribes to transfer judicial jurisdiction to state courts while other tribes retained jurisdiction. The evidence indicates that American Indians on reservations under state jurisdiction were less likely to be denied home loans during the recent housing boom and the results are robust to corrections for potential selection bias. Other findings indicate that lender market concentration is lower on reservations under state courts, and that more per-capita housing credit has flowed to these reservations in recent years. These findings are consistent with a theory developed here that lenders are more uncertain about creditor rights under tribal law.

That is Dominic Parker on the effect that (exogenous changes in) legal institutions have had on access to credit on American Indian reservations.  The basic idea is that the U.S. imposed a known (i.e., less uncertain) legal framework on some reservations, and the reduction in uncertainty about creditor rights increased credit flows in these places.

The natural extension is to ask whether small countries with bad institutions can get an instant boost if they import the external legal instutions of mature, stable countries.  But it is not clear to me that uncertainty about creditor rights is the relevant constraint in most countries with bad institutions.  Rather, it seems to me that bias and corruption are more likely channels for hindering credit flows.  (In fact Parker is explicit in his paper that he is looking at the reduction in uncertainty about creditor rights, not the removal of bias and corruption, as the channel for improving credit access.)  Can Haiti import not only Great Britain’s legal institutions but also its enforcement capabilities?  The new and exogenous legal institutions have to be credible, and this seems like a much different challenge in many developing countries compared to American Indian reservations.

Here is Parker on whether federal land programs crowd out private conservation.

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