Does the Political Institution Matter for Financial Development?

Abstract

The study examines the effect of economic institutions on financial development, where economic institutions themselves are endogenous and determined by political power. Following the theory of “economic institution” proposed by Acemoglu et al. (2004) , two groups of political power ( de jure political power or political institution and de facto political power or distribution of resource) are employed in the analysis. By using the panel data of sixty counties during 1980–2006, the empirical results show that political power is a statistically significant determinant of economic institutions and hence affects the development of financial systems. The result demonstrates that de jure political power has great significant effect on financial development than de facto political power.