Prepared for the Handbook of New Institutional Economics Legal Institutions and Financial Development

This paper describes the law and finance theory along with skeptical and competing views and reviews empirical evidence on both parts of the law and finance view. World Bank Policy Research Working Paper 3136, September 2003 The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development issues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The papers carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the view of the World Bank, its Executive Directors, or the countries they represent. Policy Research Working Papers are available online at http://econ.worldbank.org. Beck: World Bank (tbeck@worldbank.org); Levine: University of Minnesota and the NBER (rlevine@csom.umn.edu). We have received very helpful guidance from Mary Shirley, Andrei Shleifer, and three anonymous referees. 1