Influence of Formal and Informal Institutions On Debt Conditions

Abstract

This paper analyses the effect of formal and informal institutions on debt conditions for a sample of 37 countries over the period 2001-2012. The econometric methodology that we have used is panel data with fixed effects. The results show that greater legal enforcement, efficient institutions and greater trust tend to reduce the cost of debt and increase maturity. Moreover, this analysis has been carried out considering the degree of economic development and the joint effect of formal and informal institutions. Regarding with the degree of economic development, the results show that both formal and informal institutions has a greater influence in countries with a lower degree of economic development. As far as the joint effect of formal and informal institutions are concerned, our results support the view that formal and informal institutions act as substitutes in improving debt conditions.