Legal traditions and initial endowments in shaping the path of financial development

Abstract

This paper finds remarkable heterogeneity in the relationship between legal traditions and finance in former colonies. The effect of the British common law on financial development is conditioned by the level of initial endowments. In former colonies with low precolonial population density, the common law has promoted high financial development, but where endowments were abundant, this legal tradition has not worked well. In contrast, the effect of the French civil law on finance is invariant to endowments. British common law countries do not exhibit greater financial development levels than French civil law countries when endowments are sufficiently high.