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

83 Pages Posted: 7 Oct 2020 Last revised: 24 Jun 2022

See all articles by Ron Alquist

Ron Alquist

Financial Stability Oversight Council, U.S. Treasury

Benjamin Remy Chabot

Federal Reserve Bank of Chicago

Ram Yamarthy

Board of Governors of the Federal Reserve System

Date Written: February 7, 2022

Abstract

Using a unique data set of foreign equities traded on the London Stock Exchange (LSE) in the
late 19th century, we study the relation between the security of property rights, finance, and growth. We find that British investors demanded a higher equity cost of capital from firms operating in countries with weak property-rights institutions. Further, country-level expropriation risk is negatively related to 19th-century capital flows and present-day economic and financial development. A simple equilibrium model of the protection of investor property rights and capital flows rationalizes these findings. This evidence indicates that institutional quality influences growth, in part, through its effect on the cost of capital and investment.

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 (February 7, 2022). Journal of International Economics, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3677287 or http://dx.doi.org/10.2139/ssrn.3677287

Ron Alquist (Contact Author)

Financial Stability Oversight Council, U.S. Treasury ( email )

1500 Pennsylvania Avenue, 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

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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