Legal Origins and Informal Finance

Abstract

We study the impact of legal origins on informal financial development using a new, manually georeferenced dataset in a novel empirical framework. In the 19th century, Europeans arbitrarily designed colonial borders that partitioned many ethnicities across multiple countries in Africa. By comparing the bordering regions with different legal origins but belonging to the same ethnic homeland, we discover that the common law regions have better informal financial development today. Our mechanism analyses suggest that places with a common law origin maintain a style of social control that supports private market interactions, promotes good legal cultures, and facilitates information flow.

Keywords: Legal origins, Financial development, Informal finance, Legal culture, Adaptability

JEL Classification: G21, G51, O16, O55