How Institutional Quality Causes Financial Development?

Abstract

Institutional quality has received considerable attention in recent years as a potential determinant of variation in the level of financial development across countries. The current paper critically reviews the literature linking formal and informal institutions and financial development. It discusses the main theories in this regard—namely, legal origins theory, the new political economy of finance, and cultural finance. The paper provides an overview of the latest empirical research in each of these areas with a focus on the data and methods used. The directions for further research are also highlighted.