Rule of law, economic structure and development

Abstract

If rule of law encourages relationship-specific investments, then industries that use intermediates which require relationship-specific investments should have a disproportionately low share of output or labour in countries where rule of law is weak. We find robust support for this prediction using data on industry composition for 189 countries. Using a standard preference framework to construct model-implied income values from the estimated coefficients, we find that the interaction between relationship specificity and rule of law may be an economically significant determinant of aggregate outcomes through its influence on productivity and economic structure.