Law, Property rights, and growth Luc L orld Bank May 2001 Abstract This paper investigates how different legal frameworks not only affect the amount of external financing available, but also the allocation of resources among different type of assets. Using a simple model, we show that a firm will get less financing, and thus invest less, in a weak law and order environment. We also show that weaker property ights can lead to an asset substitution effect with firms investing less in intangible assets Empirically, these two effects appear to be equally important drivers of growth in sectoral value added for a large number of countries. Using individual firm data, we also show that weaker legal frameworks are associated with relatively more fixed assets, but less ong-term financing for a given amount of fixed assets JEL Classifications: G31 G32 K10. 034.04 The views expressed do not necessarily represent those of the World Bank. Paper prepared for the Third Annual Conference on Financial Market Development in Emerging and Transition Economies, Hong Kong, June 28-30, 2001Law, Property Rights, and Growth1 Stijn Claessens (University of Amsterdam and CEPR) and Luc Laeven (World Bank) May 2001 Abstract This paper investigates how different legal frameworks not only affect the amount of external financing available, but also the allocation of resources among different type of assets. Using a simple model, we show that a firm will get less financing, and thus invest less, in a weak law and order environment. We also show that weaker property rights can lead to an asset substitution effect with firms investing less in intangible assets. Empirically, these two effects appear to be equally important drivers of growth in sectoral value added for a large number of countries. Using individual firm data, we also show that weaker legal frameworks are associated with relatively more fixed assets, but less long-term financing for a given amount of fixed assets. JEL Classifications: G31, G32, K10, O34, O4 1 The views expressed do not necessarily represent those of the World Bank. Paper prepared for the Third Annual Conference on Financial Market Development in Emerging and Transition Economies, Hong Kong, June 28-30, 2001