Authors: Mohammad Amin and Jamal Ibrahim Haidar
Source: The World Bank, October 2008
There is a large literature that finds that common law countries perform better than civil law countries in various aspects of the institutional environment. The present paper extends these findings to the cost of registering property. In a sample of 121 countries, we find that the cost of registering property is lower by 22% of the world average in common law compared with civil law countries, a result largely driven by differences in non-notary costs of registering property. We also find that GDP per capita and presidential as opposed to parliamentary political system are highly correlated with lower registration costs. We provide plausible explanations for these findings. Full document.

Author: David Kaplan
Source: The World Bank, September 2008
This paper studies the effects of labor-regulation reform using data for 10,396 firms from 14 Latin American countries. Firms are asked both how many permanent workers they would have hired and how many they would have terminated if labor regulations were made more flexible. The author find that making labor regulations more flexible would lead to an average net increase of 2.08 percent in total employment. Firms with fewer than 20 employees would benefit the most, with average gains in net employment of 4.27 percent. Countries with more regulated labor markets would experience larger gains in total employment. These larger gains in total employment, however, would be achieved through higher rates of hiring and higher rates of termination. These results may explain why there is substantial opposition to labor reforms despite the predicted gains in efficiency and total employment. Full document.

Author: Mohammad Amin
Source: The World Bank, May 2008
A large literature shows that the legal tradition of a country is highly correlated with various dimensions of institutional quality. Broadly, studies show that English common law countries perform better than the French civil law countries with respect to the regulatory burden on firms, efficiency of courts and contract enforcement, corruption, and overall governance. This paper adds to the literature by showing another aspect of institutional development that conforms to the same pattern. That is, the ease with which information on laws and regulations is available to firms is superior in common law compared with civil law countries. Roughly, one-third of this difference can be explained by differences in the level of business regulations across the two legal traditions. Among other factors, the authors find that larger firms and smaller countries report much better availability of information than their respective counterparts. The authors provide some plausible reasons for these findings. Full document.

Author: Mohammad Amin
Source: The World Bank, Policy Research Working Paper 4557, March 2008
The paper provides an alternative way of testing for the theory of legal origins, one based on firm’s perception of how helpful the government is for doing business. We argue that our approach based on firm perceptions offers a number of advantages over existing studies. Specifically, we are able to demonstrate that heavier regulation in civil law compared to common law is not viewed by businesses as an efficient and socially desirable response to disorder. Further, we are able to show a strong effect of legal tradition on government helpfulness even after controlling for various institutional measures known to be correlated with the legal tradition of countries. This finding suggests that there is more to legal tradition than what existing studies have unearthed. Full document.

Author: Saugato Datta
Source: Enterprise Analysis Unit, February 2008
India's Golden Quadrilateral Program aimed at improving the quality and width of existing highways connecting the four largest cities in India. This affected the quality of highways available to firms in cities that lie along the routes of the four upgraded highways, while leaving the quality of highways available to firms in other cities unaffected. This feature allows for a difference-in-difference estimation strategy, implemented using data from the 2002 and 2005 rounds of the World Bank Enterprise Surveys for India. Firms in cities affected by the Golden Quadrilateral highway project reported decreased transportation obstacles to production, reduced average stock of input inventories (by about a week's worth of production), and a higher probability of having switched the supplier who provided them with their primary input. Firms in cities where road quality did not improve displayed no significant changes.Full document.

Authors: Simeon Djankov, Pedro Miranda, Enrique Seira and Siddharth Sharma
Source: June 2008
We use nationally representative survey data from Mexico to compare households with savings accounts in formal financial institutions to their neighbors who do not have such accounts. The survey was conducted in 2005 and contains information on nearly 5000 households. We find that while neighboring banked and unbanked households have similar demographic and occupational profiles, the former are more educated and have markedly larger wealth. The distribution of income looks similar across banked and unbanked households, except at the right tails, and in regressions in which we control for neighborhood fixed effects, income is associated with less than 5% of the variation in the decision to open an account. Our findings suggest that education levels, wealth and unobserved household attributes which might be correlated with wealth and education play a major role in explaining participation in the formal financial sector. Full document.

Authors: Simeon Djankov, Rafael La Porta, Florencio Lopez-de-Silanes and Andrei Shleifer
Source: Journal of Financial Economics, May 2008
We present a new measure of legal protection of minority shareholders against expropriation by corporate insiders: the anti-self-dealing index. Assembled with the help of Lex Mundi law firms, the index is calculated for 72 countries based on legal rules prevailing in 2003, and focuses on private enforcement mechanisms, such as disclosure, approval, and litigation, governing a specific self-dealing transaction. This theoretically-grounded index predicts a variety of stock market outcomes, and generally works better than the previously introduced index of anti-director rights. Full document.

Authors: David S. Kaplan and Joyce Sadka
Source: The World Bank, Policy Research Working Paper #4483, January 2008
The authors analyze lawsuits involving publicly-appointed lawyers in a labor court in Mexico to study how a rigid law is enforced. They show that, even after a judge has awarded something to a worker alleging unjust dismissal, the award goes uncollected 56 percent of the time. Workers who are dismissed after working more than seven years, however, do not leave these awards uncollected because their legally-mandated severance payments are larger. A simple theoretical model is used to generate predictions on how lawsuit outcomes should depend on the information available to the worker and on the worker's cost of collecting an award after trial, both of which are determined in part by the worker's lawyer. Differences in outcomes across lawyers are consistent with the hypothesis that firms take advantage both of workers who are poorly informed and of workers who find it more costly to collect an award after winning at trial. Full document.

Authors: Simeon Djankov, Tim Ganser, Caralee McLiesh, Rita Ramalho, Andrei Shleifer
Source: The World Bank, January 2008
We present new data on effective corporate income tax rates in 85 countries in 2004 from a survey of all taxes imposed on “the same” standardized mid-size domestic firm. In this cross-section, our estimates of the effective corporate tax rate have a large adverse impact on aggregate investment, FDI, and entrepreneurial activity. A 10 percent increase in the effective corporate tax rate reduces the aggregate investment-to-GDP ratio by 2 percentage points. Corporate tax rates are negatively correlated with growth, and positively correlated with the size of the informal economy. The results are robust to the inclusion of several controls. Full document.

Authors: Asli Demirgüç-Kunt, J Ernesto López-Córdova, María Soledad Martinez Pería, Christopher Woodruff
Source: The World Bank, December 2007
Despite the rising volume of remittances flowing to developing countries, their impact on the development of banking services in recipient countries has been largely unexplored. We examine this topic using county-level data for Mexico on the fraction of households that receive remittances and measures of both banking breadth (e.g., branches or accounts per capita) and depth (e.g., deposits or credit to GDP). We find that remittances are strongly associated with greater financial depth and breadth. The effects are significant both statistically and economically, even after conducting a number of robustness tests and addressing the potential endogeneity of remittances. Full document.

Authors: Kaplan, David S., Sadka, Joyce, Silva-Mendez and Jorge Luis
Source: World Bank Policy Research Working Paper 4434, December 2007
Using a newly assembled data set on procedures filed in Mexican labor tribunals, the authors of this paper study the determinants of final awards to workers. On average, workers recover less than 30 percent of their claim. The strongest result is that workers receive higher percentages of their claims in settlements than in trial judgments. It is also found that cases with multiple claimants against a single firm are less likely to be settled, which partially explains why workers involved in these procedures receive lower percentages of their claims. Finally, the authors find evidence that a worker who exaggerates his or her claim is less likely to settle. Full document.

Authors: Kaplan, David S., Gonzalez, Gabriel Martinez, and Robertson, Raymond
Source: World Bank Policy Research Working Paper 4433, December 2007
Using a census of all workers in private establishments in the formal sector in Mexico to track workers and establishments over time, this paper presents the first Mexican worker and job flow statistics. The data allow for comparing these flows across time, space, and worker characteristics. Although many patterns are similar to those documented in developing countries, the analysis uncovers patterns that have potentially important policy implications. The authors compare the results to the literature, illustrate how the statistics change during times of reform and crisis, and present novel findings that contribute to the broader literature on worker reallocations. Full document.

Authors: Marianne Bertrand, Simeon Djankov, Rema Hanna, and Sendhil Mullainathan
Source: Quarterly Journal of Economics, November 2007
We follow 822 applicants through the process of obtaining a driver’s license in New Delhi, India. To understand how the bureaucracy responds to individual and social needs, participants were randomly assigned to three groups: “bonus,” “lesson” and comparison groups. In the bonus group, participants were offered a financial reward if they could obtain their license fast; in the lesson group, participants were offered free driving lessons. To gauge driving skills, we performed a surprise driving test after participants had obtained their licenses. Several findings about corruption emerge. First, the bureaucracy is responsive to individual needs. Those who want their license faster (e.g. the bonus group), get it 40% faster and at a 20% higher rate. However, the bureaucracy is insensitive to social needs. Learning to drive safely is not how those in the bonus group obtain their license: in fact, 69% of them were rated as “failures” on our independent driving test. Second, those in the lesson group, despite superior driving skills, are only slightly more likely (by 8 percentage points) to get a license than the comparison group and far less likely (by 29 percentage points) than the bonus group. Third, bureaucrats create red tape by arbitrarily failing drivers, independent of their actual driving skills. These findings reject the view that corruption is used primarily to circumvent socially unimportant parts of regulation. Full document.

Author: Mohammad Amin
Source: The World Bank, November 2007
Between 1991 and 2001, the number of adult non-workers per household showed a secular decline in most parts of India. The decline was as sharp as 18.6 percent in the state of Haryana, 12.7 percent in Kerala and 12.6 percent in Punjab. The paper estimates the likely effect of these changes on market competition using micro data on retail stores in India. Specifically, we find a strong effect of adult non-workers per household on the level of competition. A move from the 25th percentile to the lowest value of adult non-workers per household lowers the proportion of stores facing significant competition in the city by 16.6 percentage points, a large effect given that only 38.2 percent of the stores in the sample face significant competition. We provide additional evidence which suggests that our findings are consistent with the broader literature on search cost and competition. Full document. Slide summary.

Authors: J. Ernesto López-Córdova, Alejandro Micco, and Danielken Molina
Source: Economía (Journal of the Latin American and Caribbean Economic Association), Fall 2007
In this paper we estimate the elasticity of substitution of US imports using detailed trade data over the 1990-2003 period. We use a two-stage least squares framework in order to identify the elasticity parameter of interest. Our elasticity estimates for aggregate imports are in line with those of other recent studies. Moreover, our methodology allows us to provide elasticity estimates at the sectoral level. We use the elasticity estimates to assess the extent to which Latin American and Chinese goods compete in the U.S. market by providing forecasts of how alternative policy scenarios may affect exports to the United States. We consider the following scenarios: (i) currency revaluation in China; (ii) elimination of US tariffs on Latin American exports under a hemispheric free trade agreement; and (iii) the elimination of quotas on apparel and textile exports under the Multi-Fiber Agreement. We find that a 20-percent appreciation of the renminbi reduces Chinese exports to the United States by a fifth, although since other regions increase sales to that market (0.5 percent for Latin America), US imports decline by only 1.7 percent. Hemispheric free trade would increase Latin America's exports to the United States by around three percent. The removal of MFA quotas would lead to a sharp increase in Chinese sales to the United States (40 percent), but Latin America would see its share of the US market decline by around 2 percent (2.5 percentage points). China's gains would come mainly at the expense of other regions of the world. Full document.

Authors: Alvaro González, J. Ernesto López-Córdova and Elio E. Valladares
Source: World Bank Policy Research Working Paper 4394, September 2007
The authors measure the extent to which firms in developing countries are the target of bribes. Using new firm-level survey data from 33 African and Latin American countries, the analysis shows that perceptions adjust slowly to firms’ experience with corrupt officials and hence are an imperfect proxy for the true incidence of graft. The authors then construct an experience-based index that reflects the probability that a firm will be asked for a bribe in order to complete a specified set of business transactions. On average, African firms are three times as likely to be asked for bribes relative to firms in Latin America, although there is substantial variation within each region. Last, the graft appears to be more prevalent in countries with excessive regulation and where democracy is weak. In particular, our results suggest that the incidence of graft in Africa would fall by approximately 85 percent if countries in the region had levels of democracy and regulation similar to those that exist in Latin America. Full document. Slide summary.

Authors: Alvaro Gonzalez and Francesca Lamanna
Source: World Bank Policy Research Working Paper 4316, August 2007
This paper investigates who is most affected by informal competition and how regulation and enforcement affect the extent and nature of this competition. Using newly-collected enterprise data for 6,466 manufacturing formal firms across 14 countries in Latin America, the authors show that formal firms affected by head-to-head competition with informal firms largely resemble them. They are small credit constrained, underutilize their productive capacity, serve smaller customers, and are in markets with low entry costs. In countries where the government is effective and business regulations onerous, formal firms in industries characterized by low costs to entry feel the sting of informal competition more than in other business environments. Finally, the analysis finds that in an economy with relatively onerous tax regulations and a government that poorly enforces its tax code, the percentage of firms adversely affected by informal competition will be reduced from 38.8 to 37.7 percent when the government increases enforcement to cover all firms. Full document. Slide summary.

Authors: Siddharth Sharma
Source: The World Bank, August 2007 
Firm level data from a cross-section of 57 countries is used to study how financial development affects innovation in small firms. The author finds that relative to large firms in the same industry, R\&D spending by small firms is more likely and sizable in countries at higher levels of financial development. The estimates imply that among firms doing R\&D in a country like Romania, which is at the 20th percentile of financial development, a 1 standard deviation decrease in firm size is associated with a decrease of 0.7 standard deviations in R\&D spending. In contrast, this decrease is only 0.2 standard deviations in a country like South Africa, which is at the 80th percentile of the distribution of financial development. Small firms also report producing more innovations per unit R\&D spending than large firms, and this gap is narrower in countries at higher levels of financial development. As a robustness check, the author shows that these patterns are stronger in industries inherently more reliant on external finance. Full document. Slide summary.

Authors: Mehnaz Safavian and Siddharth Sharma
Source: Journal of Comparative Economics, Volume 35, September 2007
Creditor-friendly laws are generally associated with more credit to the private sector and deeper financial markets. But laws mean little if they are not upheld in the courts. The authors hypothesize that the effectiveness of creditor rights is strongly linked to the efficiency of contract enforcement. This hypothesis is tested using firm level data on 27 European countries in 2002 and 2005. The analysis finds that firms have more access to bank credit in countries with better creditor rights, but the association between creditor rights and bank credit is much weaker in countries with inefficient courts. Exploiting the panel dimension of the data and the fact that creditor rights change over time, the authors show that the effect of a change in creditor rights on change in bank credit increases with court enforcement. In particular, a unit increase in the creditor rights index will increase the share of bank loans in firm investment by 27 percent in a country at the 10th percentile of the enforcement time distribution (Lithuania). However, the increase will be only 7 percent in a country at the 80th percentile of this distribution (Kyrgyzstan). Legal protections of creditors and efficient courts are strong complements. Full document. Slide summary.

Authors: David S. Kaplan, Eduardo Piedra, Enrique Seira
Source: World Bank Policy Research Working Paper 4322, August 2007
The authors estimate the effect on business start-ups of a program that significantly speeds up firm registration procedures. The program was implemented in Mexico in different municipalities at different dates. Authors estimates suggest that new start-ups increased by about 4 percent in eligible industries, and the authors present evidence that this is a causal effect. Most of the effect is temporary, concentrated in the first 10 months after implementation. The effect is robust to several specifications of the benchmark control group time trends. The authors find that the program was more effective in municipalities with less corruption and cheaper additional procedures. Full document. Slide summary.

Author: Mohammad Amin
Source: World Bank Policy Research Working Paper 4314, August 2007
A new dataset of 1,948 retail stores in India compiled by the World Bank's Enterprise Surveys shows that 27 percent of the stores report labor regulations as a problem for their business. Using these data we analyze the effect of labor regulation on employment at the store level. The authors find that stricter labor regulation has a strong negative effect on employment. The authors estimates show that labor reforms are likely to increase employment by 22 percent of the current level for an average store. Full document. Slide summary.

Author: Mohammad Amin
Source: The World Bank, August 2007
A recent survey of 1,948 retail stores in India conducted by the World Bank’s Enterprise surveys shows that 19 percent of all stores use computers. In the state of Kerala, the figure is as high as 40 percent. Using this survey, the author estimates the effect of computer usage on labor employment. The analysis show that this effect depends on the stringency of the underlying labor laws. Stricter labor laws magnify the labor displacing effect of computers significantly. Full document. Slide summary.

Author: Mohammad Amin
Source: The World Bank, August 2007
The paper analyzes the effect of product market competition on the average productivity of labor in India’s retail sector. The authors use a new dataset of 1,948 retail stores located in 41 cities of India compiled by the World Bank’s Enterprise surveys. According to the survey, 62% of the stores do not face any significant competition. The empirical analysis establishes a strong causal effect of competition on labor productivity of stores. Our estimates suggest an increase of 87% in labor productivity from pro-competitive reforms. Full document. Slide summary.

Author: Mehnaz Safavian and Joshua Wimpey
Source: The World Bank, July 2007
The authors tested the hypothesis that enterprises may forgo formal finance in lieu of informal credit by choice. They do so to avoid the additional regulatory scrutiny and harassment that engaging with the formal financial sector invites. The hypothesis is tested using enterprise level data on 3564 enterprises in 29 countries. In this sample, enterprises finance approximately 57% of their working capital requirements with external finance. This external finance comes from formal sources, such as commercial banks (53%) and informal sources (42%), such as trade creditors, or family and friends. In the sample, 14% of enterprises rely exclusively on informal finance. The analysis shows that the likelihood of enterprises preferring to only use informal finance is inversely related to the quality of the regulatory environment, particularly the quality of tax administration and overall governance. For example, it is that when an enterprise has been asked for bribes by tax inspectors, it is 17% more likely to prefer informal finance. Full document. Slide summary.

Author: Mohammad Amin
Source: World Bank Policy Research Working Paper 4274, July 2007
A recent survey of 1,948 retail stores in India conducted by the World Bank’s Enterprise Surveys shows that 19 percent of the stores use computers for their business. In some states like Kerala, computer usage is as high as 40 percent. Using this data we find labor regulation as an important determinant of computer usage. The estimates suggest that when faced with burdensome labor regulations, the probability of using a computer rises by over 36 percentage points for an average store. These findings formally confirm a commonly held but untested view that labor regulation may be responsible for the spread of labor saving modern technology. Full document. Slide summary.

Authors: Simeon Djankov, Caralee McLiesh and Andrei Shleifer
Source: Journal of Financial Economics, May 2007
We investigate cross-country determinants of private credit, using new data on legal creditor rights and private and public credit registries in 129 countries. We find that both creditor protection through the legal system and information sharing institutions are associated with higher ratios of private credit to GDP, but that the former is relatively more important in the richer countries. An analysis of legal reforms also shows that credit rises after improvements in creditor rights and in information sharing. We also find that creditor rights are remarkably stable over time, contrary to the hypothesis that legal rules are converging. Finally, we find that legal origins are an important determinant of both creditor rights and information sharing institutions. The analysis suggests that public credit registries, which are primarily a feature of French civil law countries, benefit private credit markets in developing countries. Full document.

Author: Rita Ramalho
Source: The World Bank, January 16, 2007
Corruption imposes substantial economic costs, yet there is little evidence on the success of anti-corruption campaigns. The author studied the 1992 impeachment of president Collor in Brazil to evaluate its impact on politically connected companies both in the short- and long-term. Using an event study methodology, the short-run effect is established: family-connected firms on average lose 2 to 9 percentage points of their value on dates when information damaging to the impeached president is released. However, this decline is reversed entirely within one year. The author concludes that the impeachment had limited success in reducing corruption in Brazil.Full document.

Authors: Simeon Djankov, Jose G. Montalvo, and Marta Reynal-Querol
Source: Cato Journal, Winter 2006
We compare results from a pilot study on entrepreneurship in China and Russia. Compared to non-entrepreneurs, Russian and Chinese entrepreneurs have more entrepreneurs in their family and among childhood friends, value work more relative to leisure and have higher wealth ambitions. Russian entrepreneurs have a better educational background and their parents were more likely to have been members of the communist party but Chinese entrepreneurs are more risk-taking and greedy and have more entrepreneurs among their childhood friends. Full document.

Authors: Simeon Djankov, Jose Montalvo and Marta Reynal-Querol
Source: The World Bank, December 2006
The existing research on foreign aid offers inconclusive evidence on the factors that make aid effective. In this paper, we test the hypothesis that the success of foreign aid depends on the fragmentation of donors. We study the supply of aid money in 112 developing countries over the period 1960-1999 and find that the presence of multiple donors in a given country renders aid ineffective. This is in part because donor fragmentation increases corruption in the recipient country’s government. In particular, if a country receiving the average amount of oda (3% of GDP) goes from a single donor to the sample mean of donor fragmentation, corruption increases by 7% to 10%.Full document.

Authors: Simeon Djankov, Caralee McLiesh and Rita Ramalho
Source: Economics Letters, September 2006
Using objective measures of business regulations in 135 countries, we establish that countries with better regulations grow faster. Improving from the worst quartile of business regulations o the best implies a 2.3 percentage point increase in annual growth. Full document.

Authors: Simeon Djankov, Yingyi Qian, Gérard Roland, and Ekaterina Zhuravskaya
Source: American Economic Review Papers and Proceedings, May 2006
Full document.

Authors: Simeon Djankov, Yingyi Qian, Gerard Roland and Ekaterina Zhuravskaya
Source: Journal of the European Economic Association, May 2006
Full document.

Authors: Simeon Djankov, Caroline Freund and Cong Pham
Source: World Bank Policy Research Working Paper 3909, May 2006
The authors determine how time delays affect international trade using newly collected World Bank data on the days it takes to move standard cargo from the factory gate to the ship in 126 countries. They estimate a modified gravity equation, controlling for endogeneity and remoteness. On average, each additional day that a product is delayed prior to being shipped reduces trade by at least 1 percent. Put differently, each day is equivalent to a country distancing itself from its trade partners by 70 kilometers on average. Delays have an even greater impact on developing country exports and exports of time-sensitive goods, such as perishable agricultural products. In particular, a day's delay reduces a country's relative exports of time-sensitive to time-insensitive agricultural goods by 6 percent. Full document.

Authors: Simeon Djankov, Jose Montalvo and Marta Reynal-Querol
Source: The World Bank, March 2006
Foreign aid provides a windfall of resources to recipient countries and may result in the same rent seeking behavior as documented in the “curse of natural resources” literature. In this paper we discuss this effect and document its magnitude. Using data for 108 recipient countries in the period 1960 to 1999, we find that foreign aid has a negative impact on democracy. In particular, if the foreign aid over GDP that a country receives over a period of five years reaches the 75th percentile in the sample, then a 10-point index of democracy is reduced between 0.6 and one point, a large effect. For comparison, we also measure the effect of oil rents on political institutions. The fall in democracy if oil revenues reach the 75th percentile is smaller, (0.02). Aid is a bigger curse than oil. Full document.