ESSAYS ON INSTITUTIONS, FINANCIAL DEVELOPMENT, AND ECONOMIC GROWTH

A number of recent papers using a linear specification have indicated that private property institutions are a fundamental determinant of growth. In my first paper, I use a semi-nonparametric partially linear model to provide evidence against a linear specification and to support nonlinearities in the relationship. The findings indicate that the exogenous component of private property institutions contributes positively to economic growth for countries in the lower and middle stages of private property institutions and have a negative relationship with economic growth of countries having the highest level of private property institutions. These results are confirmed when using an appropriate parametric specification and estimation by GMM. When using different measures of private property institutions as the 'rule of law' and 'political freedom', the results are consistent. The second paper documents a nonlinear relationship between financial development and income inequality across developing and developed countries, and uncovers the empirical root of this phenomenon. The source is in two parts: there is a close relationship between the level of economic development and the level of financial development across countries; and the impact of financial development on income inequality is contingent on the level of economic development. The 1990s saw considerable economic turbulence due to varying degrees of financial crisis in many countries in Asia and Latin America. In the third paper, I document that a combination of external shocks, weak institutional background and excessive bank lending contributed to the differential responses by countries to financial crisis. Using a version of the models of Bernanke and Gertler (1990) and Jensen and Meckling (1976), the paper builds a theoretical model to show that institutional problems, coupled with external shocks, can affect the capital structure of firms and lead to a choice of projects having low net present value, which carries implications for aggregate investment and growth.. In the empirical counterpart, the study shows that proxies for weak institutions of corporate finance, excessive bank lending and terms of trade shocks played a central role in determining the magnitude of growth and investment collapse as observed in these regions.