The questions examining the relationship between a country’s legal environment and its economic outcomes are important. These are motivated by theories linking judicial efficiency and economic outcomes as developed under the new institutional economics (North, 1990 and Williamson, 1995). First, as a regulator, the judiciary is responsible for enforcing the rules of law. Inefficiency in enforcement makes the rule of law weaker and may hurt economic activity. Second, as an enforcer of contracts, judicial efficiency is likely to be important for firm outcomes where delays in contract enforcement lead to opportunistic behaviour, lowering productive efficiency. Early influential work on institutions and economic development studied the combined effects of a bundle of institutions using variations across aggregate economies. More recent work study the effect of the judiciary in the context of specific reforms on the outcomes of registered manufacturing firms. They show that lowering congestion in courts leads to increased access to credit and lowering of interest rates.
We will contribute to this literature by constructing relevant measures of friction from trial level data at subordinate courts and examining its effects in a broader setting focusing on differential effects across formal and informal sector firms.
The study design is posited on the reasoning that an efficient judiciary would instil confidence in the enforceability of market-based contracts and minimize inefficient relational contracting. However, the functioning of the judiciary in a location could itself be determined by economic activity or lobbying by certain industries to induce delays strategically. In order to causally identify how firms respond to judicial delays, we will use non-experimental empirical methods including instrumental variable and difference in differences approaches. For the first, we will make use of changes in judicial staffing due to unplanned vacancies or delays in filling vacant judgeships. For the second, we will exploit the staggered roll-out of specific tribunals aimed at resolving specific types of cases. These strategies allow us to examine both short and long run shocks to judicial capacity and their subsequent effects on firm-level outcomes.