Financial Development and Genetic Diversity
Texas Tech University
University of California, Riverside (UCR) - Department of Finance and Management Science
University of Arizona
April 9, 2014
A growing body of literature suggests that a country’s level of financial development plays an important and inextricable role in the economic growth process. There is substantial variation in the level of financial development across countries that research has been trying to explain. In this paper, we investigate how a deep-rooted characteristic – a country’s degree of genetic diversity – impacts the level of financial development. Building on the recent work by Ashraf and Galor (2013 AER), we hypothesize that a country’s degree of genetic diversity can impact its level of financial development through two channels: (i) indirectly through its effect on productivity and the subsequent demand for financial development, and (ii) directly through its effect on innovation in the financial sector. Paralleling the argument put forth by Ashraf and Galor, we predict a hump-shaped relationship between a country’s degree of genetic diversity and its level of financial development. Using data from almost 150 countries, our cross-sectional analysis reveals results that are consistent with our prediction; namely, we observe a significant hump-shaped relation between a country’s degree of genetic diversity and its level of financial development. This result is robust to several different proxy measures of financial development, and various controls that have previously been shown to impact financial development.
Number of Pages in PDF File: 43
Keywords: financial development, genetic diversity
JEL Classification: G1, G2, O1, O4, O5working papers series
Date posted: March 16, 2014 ; Last revised: April 10, 2014
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