The Review of Economics and Statistics Vol. 89 No. 4 2007
The Quality of the Legal System, Firm Ownership, and Firm Size
Abstract
We show that firm size is increasing with the quality of the legal system in Mexico. A 1-standard-deviation improvement in the quality of the legal system is associated with a 0.15–0.30 standard deviation increase in firm size. We also show that the legal system affects firm size by reducing the idiosyncratic risk faced by firm owners. The legal system has a smaller impact on partnerships and corporations than on proprietorships, where risk is concentrated in a single owner. All of the findings are robust to instrumenting for legal quality using historical conditions. By focusing on firms in a single country, the data draw attention to the importance of informal institutions.
- DOI
- 10.1162/rest.89.4.601
- Volume
- 89
- Issue
- 4
- Pages
- 601-614
- Language
- en
- Sources
- openalex crossref