Rebundling Institutions: How property rights and contracting institutions combine for growth

Abstract

This study provides empirical evidence for the joint workings of property rights and contracting institutions as fundamental causes of growth. In a two-step panel estimation procedure that uses data from 130 countries over the period 2005–2015, I find that the income effects of legal reforms in property rights institutions vary with the prevalent quality of legal contracting institutions and vice versa. Decomposing the interaction effects for groups of countries with different quality combinations reveals that the quality fit of the two types of institutions matters for not only the size but also the direction of the interaction effects. In countries with absent or bad legal institutions, legal reforms considering only one type can even reduce income. Piecemeal reforms work best when they close quality gaps and they can backfire when the gap widens. The findings remain robust after tackling endogeneity issues, extending the period of analysis, estimating alternative models, and using alternative estimators. The findings imply that legal reforms have to be coordinated across different types of institutions and consider possible interferences with extra-legal rules and practices.