1 The Role of Justice in Development: Empirical Evidence 5 marize the effects of the speed of judicial institutions, which lends strength to the enforcement of contracts in the event of violation, on various business and market outcomes. Specifically, an environment of effective contract enforcement promotes competitive credit markets, increases firm productivity by lowering contracting costs, and supplements other market oriented reforms (Ahsan, 2013; Sequeira, 2016).

There are four main mechanisms highlighted in the literature that show a causal impact between contracting institutions and firm outcomes. First, weak enforcement might hinder firm-to-firm trade. There might be weaker incentives to cooperate in a contractual agreement if courts are slower and less reliable at enforcing contracts (Chemin, 2012). Second, weak enforcement might affect firms’ incentives to invest and distort production decisions. Crawford, Klein, and Alchian (1978) demonstrate that slow courts will reduce investment if there is room for post-contractual opportunistic behavior by a firm’s partner once investment costs are sunk. Weak enforcement might also distort the input materials used by firms, as firms rely solely on trusted sources rather than on the most efficient sources, avoid purchasing the inputs altogether, or switch to a different production process (T. Chakraborty et al., 2018). Third, slow enforcement increases the opportunistic behavior of borrowers. Creditors might respond to this strategic behavior by reducing the availability of credit (Aberra and Chemin, 2018; Jappelli, Pagano, and Bianco, 2005). Fourth, better judicial enforcement might increase the probability of providing a loan as well as the recovery of loans.

The magnitude and direction of these causal links are established in the recent empirical literature, with a particular focus on India. Chemin (2012) measures the effects of faster courts on firms’ contracting behavior and performance in India. The author exploits spatial variation in the implementation of a legal reform amending the code of civil procedure, which sped up trials in courts. The findings suggest that the reform led to fewer breaches of contract, encouraged investment, and facilitated access to finance. This is consistent with the first and second mechanisms according to Aboal, Noya, and Rius (2014) provide a systematic review of the causal link between contract enforcement and investment. They conclude that the empirical evidence establishing this link is weak, based on reviewing 19 empirical studies published between 1990 and 2010. Given the period of review, many of the studies take a broad, macro view of the relationship, rather than deep diving into the micro-foundations. Further, some of the studies reviewed conflate protection of property rights and general rule of law with contract enforcement, leading to the general conclusion of positive association between “contracting” institutions and capital accumulation. There has been an increase in empirical causal studies since 2010, which point to a more established connection between better judiciaries and better firm outcomes.

firm productivity. Ahsan (2013) studies the complementarity between the effects of trade liberalization and judicial efficiency on firm productivity (TFP). The author uses spatial variation in judicial efficiency (at lower level courts) as a key impediment or enabler to help pass-through of input tariff reduction on large firm productivity. His findings suggest that a relation-specific (as opposed to generic) input supply chain leads to the holdup problem, where the firm under-invests in the production of such inputs lest the buyer backs out. He finds that for a 10 percentage point drop in input tariffs, firms located in the 75th percentile of judicial efficiency gain an additional 3.6 percentage points in productivity when compared to those located in median judicial efficiency areas.

Similarly, Amirapu (2017) examines the effect of slow courts on the performance of in India. Using variation across industries in their reliance on contracts, along with variation across Indian states in the average speed of courts, the author finds a strong positive effect of court efficiency on firm growth. Transactions involving relationship-specific investments are more exposed to post-contractual opportunism and hence have greater need for efficient contract enforcement. The