Law and credit constraints in transition economies


  •  I am especially indebted to Werner Baer for continuous support and help. I am also grateful to Dan Bernhardt, Giovanni Facchini, Anne Villamil, Hadi S. Esfahani, and Brett Graham for valuable comments. All remaining errors are mine. Original version of the paper: April 29, 2006.


Using a survey of over 4,000 firms in 21 transition economies, this paper investigates how legal extensiveness (law on the books) and legal effectiveness (law in practice) affect availability of bank finance. Our findings suggest that both law on the books and law in practice are important, but that they impact firms of different sizes differently. Small firms appear to be the most credit constrained in countries with weak creditor rights and with weak contract enforcement, while large firms are the most credit constrained in countries with weak courts and unclear and inconsistent laws pertaining to firms’ business operations.