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A growing body of theoretical and empirical work identifies the ability of a country's institutions to protect private property and provide incentives for investment as a key explanation for the persistent disparity in financial market development and economic performance across countries. We add to this literature by analyzing the impact of institutions on financial development using data on the financial decisions of immigrants and the native-born in the U.S. While all of the individuals whose decisions we analyze face the same formal institutional framework in the U.S., immigrants bring with them their experiences with institutions in their home countries. Our findings indicate that overall, immigrants are less likely than the native-born to participate in U.S. financial markets. This finding is robust to including controls for income, age, education, marital status, and time spent in the U.S. We also find that immigrants who come from countries with institutions that are more effective at protecting property rights are more likely to participate in U.S. financial markets. In fact, variation in institutional quality in immigrant source countries fully explains the low financial market participation of immigrants relative to the native-born. Having controlled for institutional quality in the home country, the fact that an individual is an immigrant has no additional power to explain financial market participation. These findings are generally robust to alternative measures of institutional effectiveness and to various methods of controlling for unobserved individual characteristics.

Institutional Quality and Financial Market Development: Evidence from International Migrants in the U.S.