Alvaro Esteban Cox Lescano.

06/04/2018

Orientador: Claudio Ferraz.

Banca: Juliano Assunção. Leonardo Monteiro Monasterio.

The literature on economic development emphasized that historical events have long-term persistence over current social welfare. Specifically, places with historical state capacity are more developed than places without it. In this paper, we focus on how rule of law presence, one crucial dimension of state capacity, affects the dynamics and structure of firms. Therefore, we focus on one mechanism through which state capacity affects development. This relationship is analyzed for the Peruvian case. We use rich data from the national tax collector, the national economic census and a historical census of the state administration carried in 1793 to analyze the persistent effect of rule of law presence over firms’ development indicators. Our baseline results present evidence of a persistent and significant positive effect of the historical presence of rule of law over formalization, firm’s size and labor productivity; also, we find that firms prefer to relate each other through markets rather than adopt vertical structures in places with historical presence of rule of law. Our evidence is robust to the addition of important historical socioeconomic variables and the exclusion of Lima. Furthermore, the presence of courts appears to be the most important dimension of rule of law presence. Second, we analyze the effect of the historical presence of rule of law over the current presence of rule of law as a potential channel of persistence. We argue that having rule of law institutions in the colonial period affected the relative cost of subsequent investments in state capacity held during the republic period. Our findings are robust to alternative specifications (IV model and network framework). Finally, we present preliminary evidence on mechanisms. Municipalities with historical presence of rule of law have loosened financial frictions, demand less informal credit and have better conditions to obtain a functioning license. These results suggest that informal and formal rules may evolve differently and that the cost of access to rule of law-related services is important.

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