Rafael La Porta’s research while affiliated with Harvard University and other places

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Publications (89)


Long-Term Expectations and Aggregate Fluctuations
  • Article

April 2024

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58 Reads

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4 Citations

NBER Macroeconomics Annual

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Nicola Gennaioli

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Rafael La Porta

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[...]

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Trust and Insurance Contracts

September 2021

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122 Reads

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29 Citations

Review of Financial Studies

We assemble homeowner insurance claims from 28 independently operated country subsidiaries of a multinational insurance firm. We propose a new insurance model, in which consumers can make invalid claims and firms can deny valid claims, as is common in the data. In the model, trust and honesty shape equilibrium insurance contracts, disputes, and claim payments, especially when disputes are too small for courts. We test the model by investigating claim incidence, dispute, rejection, and payment, as well as insurance costs and pricing across countries. The evidence is consistent with the centrality of trust for insurance markets, as our model predicts. Authors have furnished data/code, which are available on the Oxford University Press Web site next to the link to the final published paper online.


Diagnostic Expectations and Stock Returns

July 2019

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142 Reads

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275 Citations

The Journal of Finance

We revisit La Porta's (1996) finding that returns on stocks with the most optimistic analyst long‐term earnings growth forecasts are lower than those on stocks with the most pessimistic forecasts. We document the joint dynamics of fundamentals, expectations, and returns of these portfolios, and explain the facts using a model of belief formation based on the representativeness heuristic. Analysts forecast fundamentals from observed earnings growth, but overreact to news by exaggerating the probability of states that have become more likely. We find support for the model's predictions. A quantitative estimation of the model accounts for the key patterns in the data. This article is protected by copyright. All rights reserved


Informality and Development

August 2014

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390 Reads

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1,198 Citations

Journal of Economic Perspectives

In developing countries, informal firms account for up to half of economic activity. They provide livelihood for billions of people. Yet their role in economic development remains controversial with some viewing informality as pent-up potential and others viewing informality as a parasitic organizational form that hinders economic growth. In this paper, we assess these perspectives. We argue that the evidence is most consistent with dual models, in which informality arises out of poverty and the informal and formal sectors are very different. It seems that informal firms have low productivity and produce low-quality products; and, consequently, they do not pose a threat to the formal firms. Economic growth comes from the formal sector, that is, from firms run by educated entrepreneurs and exhibiting much higher levels of productivity. The expansion of the formal sector leads to the decline of the informal sector in relative and eventually absolute terms. A few informal firms convert to formality, but more generally they disappear because they cannot compete with the much more-productive formal firms.


Table 1 Sample coverage for GDP and years of schooling
Table 1 continued
Fig. 2 Prediction errors from a regression of flush toilets on regional GDP per capita and country fixed effects
Table 2 Dispersion of regional GDP per capita
Table 2 continued

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Growth in Regions
  • Article
  • Full-text available

April 2013

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587 Reads

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166 Citations

Journal of Economic Growth

We use a newly assembled sample of 1,503 regions from 82 countries to compare the speed of per capita income convergence within and across countries. Regional growth is shaped by similar factors as national growth, such as geography and human capital. Regional convergence is about 2.5% per year, not more than 1% per year faster than convergence between countries. Regional convergence is faster in richer countries, and countries with better capital markets. A calibration of a neoclassical growth model suggests that significant barriers to factor mobility within countries are needed to account for the evidence.Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.

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Letter Grading Government Efficiency

August 2012

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169 Reads

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91 Citations

Journal of the European Economic Association

We mailed letters to non-existent business addresses in 159 countries (10 per country), and measured whether they come back to the return address in the US and how long it takes. About 60% of the letters were returned, taking over 6 months, on average. The results provide new objective indicators of government efficiency across countries, based on a simple and universal service, and allow us to shed light on its determinants. The evidence suggests that both technology and management quality influence the quality of government.


Human Capital and Regional Development

June 2011

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1,999 Reads

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854 Citations

Quarterly Journal of Economics

We investigate the determinants of regional development using a newly constructed database of 1,569 subnational regions from 110 countries covering 74% of the world’s surface and 97% of its GDP. We combine the cross-regional analysis of geographic, institutional, cultural, and human capital determinants of regional development with an examination of productivity in several thousand establishments located in these regions. To organize the discussion, we present a new model of regional development that introduces into a standard migration framework elements of both the Lucas (1978) model of the allocation of talent between entrepreneurship and work, and the Lucas (1988) model of human capital externalities. The evidence points to the paramount importance of human capital in accounting for regional differences in development, but also suggests from model estimation and calibration that entrepreneurial inputs and possibly human capital externalities help understand the data. JEL Codes: O110, R110, I250.


The Unofficial Economy in Africa

February 2011

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202 Reads

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52 Citations

We examine the productivity of informal firms (those that are not registered with the government) in 24 African countries using field work and World Bank firm level data. We find that productivity jumps sharply if we compare small formal firms to informal firms, and rises rapidly with the size of formal firms. Critically, informal firms appear to be qualitatively different than formal firms: they are smaller in size, produce to order, are run by managers with low human capital, do not have access to external finance, do not advertise their products, and sell to largely informal clients for cash. Informal firms thus occupy a very different market niche than formal firms do, and rarely become formal because there is very little demand for their products from the formal sector.Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.


Investment and Cashflow

March 2010

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114 Reads

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2 Citations

SSRN Electronic Journal

We provide new estimates of investment-cashflow sensitivities for a large cross section of U.S. firms from 1971–2006. Our tests extend the literature in several key ways and provide strong evidence that cashflow matters beyond its correlation with investment opportunities. Controlling only for M/B, a dollar of current- and prior-year cashflow is associated with an additional 0.59ofinvestmentforfirmsthataretheleastlikelytobeconstrainedand0.59 of investment for firms that are the least likely to be constrained and 0.75 for firms that are the most likely to be constrained. Investment-cashflow sensitivities for the two groups drop to a conservatively estimated but still significant 0.32 and 0.67, respectively, after correcting for measurement error in M/B (our proxy for Q). The results suggest that financing constraints and, perhaps, free cashflow problems are important for investment decisions.


Citations (74)


... As a result, the development of different Generalised Autoregressive Conditional Heteroskedasticity (GARCH) models has significantly advanced our understanding of volatility. Bordalo et al., (2024) provide insight into an additional crucial element of equity volatility, namely, volatility clustering. This phenomena suggests that the current shocks in volatility have a lasting impact on the anticipated levels of volatility in the future. ...

Reference:

COMPARATIVE ANALYSES OF DISTRIBUTIONS IN ASSYMETRY GARCH MODELLING: A STUDY OF NGN/USD EXCHANGE RATE
Long-Term Expectations and Aggregate Fluctuations
  • Citing Article
  • April 2024

NBER Macroeconomics Annual

... But we suspect that the expectational biases implied by our model can help to explain puzzling aspects of market outcomes as well. For example, Bordalo et al. (2024) argue that a number of well-known puzzles about the behavior of the aggregate stock market are in fact all consistent with a simple dividend discount model of stock prices, under the hypothesis that market expectations regarding firms' future earnings differ systematically from rational expectations in a particular way, in a way that is also indicated by the biases observed in survey expectations of earnings. ...

Belief Overreaction and Stock Market Puzzles
  • Citing Article
  • September 2023

Journal of Political Economy

... Given the volume of claims filed each day, it would be prohibitively expensive for insurance companies to employ staff to scrutinize each claim for signs of fraud (Gennaioli et al., 2020). Instead, many businesses employ automated algorithms to identify allegations that may necessitate additional investigation (Dexe, Franke & Rad, 2021). ...

Trust and Insurance Contracts
  • Citing Article
  • September 2021

Review of Financial Studies

... Whitley (1992) uses the term 'national business system' to refer to those elements of the national institutional context most relevant to understanding business practices. Elements of the national business system include market organization, the role of the state and regulation, employment practices, and the financial system (Djankov, La Porta, Lopez de Silanes, Florencio, & Botero, 2004;La Porta, Lopez-de-Silanes, Shleifer, & Vishny, 2000;La Porta et al., 2002;La Porta et al., 1999;La Porta et al., 2006). The concept of national business system extends the scope of country level effects beyond the premise that 'law matters' to include enforcement, disclosure, and related and supporting institutions. ...

The Regulation of Labor
  • Citing Article
  • January 2004

SSRN Electronic Journal

... In order to substantiate the concept, the author employs Diagnostic Expectations and Stock Returns [19]. Research has a look at observed that the representativeness heuristic stimulated inventory marketplace investors, inflicting them to depend on salient however probably deceptive patterns, main to 15% poorer funding effects. ...

Diagnostic Expectations and Stock Returns
  • Citing Article
  • July 2019

The Journal of Finance

... It follows then that the investor should expect to place more trust in management whom they behave as stewards to accomplish business without much board interruption since agency problems have been reduced (Sama et al., 2022). Also, in such an environment there is much respect for the law, and transactions are organized in orderly, efficient, fair, and predictable manners (Judge et al. 2008;La Porta et al., 1999). Besides, there is a security for wealth and property rights against expropriation, since the judicial system effectively punishes unlawful managerial behavior (Swaleheen, 2011). ...

Investor Protection and Corporate Valuation
  • Citing Article
  • January 1999

SSRN Electronic Journal

... Administrative distance may negatively influence a common owner's ability to access and interpret information related to their agents, caused, for instance, by language barriers (Ferreira et al., 2017). Differences in shareholder rights (e.g., La Porta et al., 2000) may influence how well a common owner can use information to influence an investee firm. Cultural distance may hinder effective communication between foreign investors and local stakeholders, making it challenging to gather accurate information regarding agents and their potentially effective competitive actions. ...

Investor Protection and Corporate Governance
  • Citing Article
  • January 2000

SSRN Electronic Journal

... We consider 16 control variables, identified in accordance with previous studies (e.g., Botero et al. 2004;Parsa et al. 2018;Maji 2019;Monteiro et al. 2023;Morán-Muñoz et al. 2024), which represent the most important (i) firm-level factors related to the company's capabilities and resources and the board of directors' effectiveness; (ii) the main corporate governance mechanisms that approve, control, and supervise strate-gies and decisions; and (iii) the most relevant institutional pressures at the national level related to LHR. ...

The Regulation of Labor

Quarterly Journal of Economics

... Based on an international database capturing judicial independence and law development in 71 countries, Porta et al. (2002) propose that a common law tradition is associated with stronger judicial independence vìs-à-vìs a civil law tradition, and the degree of independence predicts higher economic and political freedom. Beck and Levine (2005) use Porta et al. (2002)'s database to test whether the described political and adaptability channels through which legal traditions influence the development of financial systems facilitate firms' access to finance. ...

The Guarantees of Freedom
  • Citing Article
  • January 2002

SSRN Electronic Journal

... "News" about the creditworthiness of a sovereign borrower affects the spreads charged to others. The presence of common factors and "excess sensitivity" to shared international fundamentals has also been detected in other variables which are related to cross-border capital flows, such as the emerging country funds discounts (see Hardouvelis, La Porta, and Wizman (1994)); these authors also link the observed comovement to U.S. fundamentals and "investor sentiment". ...

What moves the discount on country equity funds? The internationalization of equity markets
  • Citing Article
  • January 1994