The Growth Effects of Property Rights: The Role of Finance

SummaryUsing a variety of statistical approaches, we show that the relationship between property rights and growth is nonlinear; stronger enforcement of property rights raises growth up to a point before growth begins to decline. We provide a simple theoretical rationale for this conclusion using a model with informational asymmetries in the financial sector. Stronger property rights have two opposing effects. On the one hand it increases capital formation and growth. On the other hand it encourages bad borrowing practices. Thus there exists an optimal level of property rights which maximizes growth. However, as financial markets mature, the negative effects associated with stronger property rights become weaker.