The Real Effects of Judicial Enforcement: Evidence from Italy
Authors: Vincenzo Pezone (Goethe University)
Title: The Real Effects of Judicial Enforcement: Evidence from Italy
Abstract: I analyze the real effects of the quality of the judiciary by showing that an increase in the average duration of civil proceedings reduces firm's employment. I exploit a reorganization of court districts in Italy as an exogenous shock to courts' productivity. Using an instrumental variable approach, I estimate an elasticity of employment to average trial length between -0.24 and -0.29. These results are very different from OLS estimates that do not control for endogeneity and suggest that stronger law enforcement eases financing constraints. The effects are more pronounced in highly levered and more financially dependent firms, and appear to affect mainly firms in less financially developed areas. Revenues respond more slowly than employment to the reform, and wages fall as the judiciary improves. There is no effect on capital structure and profitability. These results give a more complete picture of the interplay between legal institutions and real economic outcomes.