1 The Role of Justice in Development: Empirical Evidence 6 paper finds that the interaction between state level court efficiency and industry level relationshipspecificity is highly predictive of future growth in India’s formal manufacturing sector.

Using microdata on Indian manufacturing plants, the authors show that in states with weaker enforcement–as measured by judicial lags–production and sourcing decisions appear systematically distorted. Among plants in industries that tend to rely more heavily on inputs that require customization, those in states with more congested courts shift their expenditures away from intermediate inputs, whereas they find the opposite in industries that tend to rely on standardized inputs. The authors find that weak enforcement exacerbates a holdup problem that arises when using inputs that require customization, distorting both the intensive and extensive margins of input use. Poor contract enforcement distorts production in two ways. There is a direct impact: if a producer uses a supplier for which there is a severe contracting friction, use of that input will be distorted, which will directly lower productivity. There is also an indirect impact: a severe contracting problem might lead a producer to switch to a more costly supplier or less efficient technology to avoid the friction. On average across states, the boost to productivity is roughly 5%, and the potential gains of court improvements for the states with the most congested courts are roughly 10%. The authors conclude that economic benefits to improving courts may be large. Preliminary results suggest that, for each year reduction in the average age of pending cases, the state’s aggregate productivity would increase by about 3%.

# **Justice E↵ects on Credit Markets**

There is a general consensus in the literature on the positive effects of strong justice institutions on credit markets. Both the efficiency and quality of courts have been positively associated with better credit availability and the development of credit markets. The consensus also extends to the mechanism behind this effect: prevention of moral hazard through proper enforcement of the credit contracts and increasing competition between lenders. However, caution must be exercised in examining how increasing competition among lenders ultimately affects borrowers’ welfare, which would depend on the presence of well-developed insurance markets. The papers that address this issue (Horioka and Sekita, 2011; T. J. Besley, Burchardi, and Ghatak, 2012; Kranton and Swamy, 1999) present cautionary evidence regarding the effects of competition between lenders on credit outcomes.

Cristini, Moya, and Powell (2001) analyze how variations in the effectiveness of the legal system across different provinces in Argentina have affected the development of credit markets. They find strong results that provinces with poor legal enforcement have less credit available to borrowers and banks’ non-performing loans are higher. The authors conclude that improvements in Argentina’s legal system would result in a significant increase in the availability of credit. Jappelli, Pagano, and Bianco (2005) also evaluate this relationship by using panel data from Italian provinces. The authors show that provinces with longer trial durations or larger backlogs have less developed credit markets and lower credit availability.

Also in Italy, Schiantarelli, Stacchini, and Strahan (2016) use detailed firm level panel data to show that firms are more likely to default against banks when legal enforcement is weak. A similar conclusion is reached by Ponticelli and Alencar (2016), who measure the effects of proper enforcement of Brazilian bankruptcy reform on firm performance using congestion in courts as the enforcement variable. However, since congestion can be endogenous, the authors use "extra jurisdiction" as the instrument. “Extra jurisdiction” is a measure of the number of neighboring municipalities that do not qualify to become an independent judicial district, increasing the congestion of existing courts. The authors find that municipalities that are one standard deviation below the mean with