The Price of Property Rights: Institutions, Finance, and Economic Growth

71 Pages Posted: 7 Oct 2020

See all articles by Ron Alquist

Ron Alquist

Office of Financial Research

Benjamin Remy Chabot

Federal Reserve Bank of Chicago

Ram Yamarthy

Office of Financial Research, US Department of the Treasury

Date Written: August 19, 2020

Abstract

Using a unique data set of foreign equities traded on the London Stock Exchange in the late 19th century, we study the relation between expropriation risk, finance, and economic development. We find that British investors demanded a higher cost of equity capital from firms located in countries with weak property-rights institutions than they did from similarly risky firms in other countries. Further, the country-level cost of capital associated with expropriation risk is negatively related to present-day income and financial development. A simple equilibrium model of international capital flows and the expropriation risk premium rationalizes these results. Taken together, this evidence suggests that the quality of institutions influence growth and development, in part, through its effect on asset prices.

Keywords: Institutions, property rights, cost of capital, economic growth, financial development

JEL Classification: F36, G15, O16

Suggested Citation

Alquist, Ron and Chabot, Benjamin Remy and Yamarthy, Ram, The Price of Property Rights: Institutions, Finance, and Economic Growth (August 19, 2020). Available at SSRN: https://ssrn.com/abstract=3677287 or http://dx.doi.org/10.2139/ssrn.3677287

Ron Alquist (Contact Author)

Office of Financial Research ( email )

717 14th Street, NW
Washington, DC 20220
United States

Benjamin Remy Chabot

Federal Reserve Bank of Chicago ( email )

230 South LaSalle Street
Chicago, IL 60604
United States

Ram Yamarthy

Office of Financial Research, US Department of the Treasury ( email )

717 14th Street, NW
Washington, DC 20220
United States

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