Contract Enforcement and the Allocation of Capital

40 Pages Posted: 26 Feb 2009 Last revised: 30 Jan 2013

See all articles by Jiaren Pang

Jiaren Pang

Tsinghua University - School of Economics & Management

Haibin Wu

City University of Hong Kong (CityUHK)

Date Written: February 26, 2009

Abstract

This paper provides empirical evidence that contract enforcement matters for the flow of investment or allocation of capital. Using the estimated investment elasticities as the measure of capital allocation efficiency, we find that better contract enforcement is associated with more efficient allocation of capital, and this effect is more pronounced in industries which are more contract intensive. The results are robust to possible endogeneity, omitted variables bias, and outliers.

Keywords: Capital Allocation, Contracts, Institutions, Investment

JEL Classification: E22, G31, D92, K12

Suggested Citation

Pang, Jiaren and Wu, Haibin, Contract Enforcement and the Allocation of Capital (February 26, 2009). Available at SSRN: https://ssrn.com/abstract=1350143 or http://dx.doi.org/10.2139/ssrn.1350143

Jiaren Pang

Tsinghua University - School of Economics & Management ( email )

Beijing, 100084
China

Haibin Wu (Contact Author)

City University of Hong Kong (CityUHK) ( email )

83 Tat Chee Avenue
Kowloon
Hong Kong

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