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

Published online by Cambridge University Press:  01 December 2008

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


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.

Research Article
Copyright © The JOIE Foundation 2008

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