Journal of Institutional Economics

Research Article

Unveiling de Soto's mystery: property rights, capital formation, and development

CARRIE B. KEREKESa1 c1 and CLAUDIA R. WILLIAMSONa1

a1 Department of Economics, West Virginia University, Morgantown, West Virginia, USA

Abstract

Hernando de Soto attributes the poor economic performance of developing countries to insecure property rights. When property rights are not well-defined individuals do not have the incentives to invest in capital, and assets cannot be used as collateral, hindering capital formation and economic growth. This paper tests de Soto's hypothesis empirically by examining how the security of property rights impacts wealth, collateral, and capital formation across nations. Using several different measures and model specifications, we find support for de Soto's conjecture. Our results suggest that better defined property rights would result in substantial improvements in capital formation and economic growth in developing countries.

Footnotes

The authors would like to extend our thanks to two anonymous referees for their valuable comments and suggestions. We would also like to thank Russell S. Sobel and Peter T. Leeson for useful comments. In addition, we thank Justin Ross, Pavel Yakovlev, and the participants at the 2006 APEE Conference.