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This paper analyzes the impact of weak contracting institutions on economic development and the wealth distribution in a Ramsey-type growth model. We show that, at low levels of accumulation, weak contracting institutions strongly favor the economic elite: By preventing market entry, such institutions provide the “oligarchs” with cheap access to credit—which is highly beneficial as long as capital is scarce. At the same time, a broad cross-section of society faces only low returns so that capital accumulation is slowed down and the capital stock gets concentrated in the hands of the elite. At higher levels of development, however, weak contracting institutions are harmful to all segments of society and institutional reform becomes unanimously supported. So the model helps to explain the pervasiveness of weak contracting institutions in less-advanced economies. [ABSTRACT FROM AUTHOR]

We introduce a new, easily accessed and objective measure of the enforceability of contracts and the security of property rights. This measure, called “contract-intensive money” or CIM, is based on citizens’ decisions regarding the form in which they choose to hold their financial assets. Country case studies show that CIM varies over time in response to political events in ways predicted by our arguments. We also show that CIM is positively related to investment and growth rates, and to the relative size of contract-dependent sectors of the economy. [ABSTRACT FROM AUTHOR]