1 The Role of Justice in Development: Empirical Evidence 7 respect to potential extra jurisdiction have 28.3% less congested courts and a 5% larger increase in secured loans per firm. In other words, firms with lower potential extra jurisdiction experienced higher increase in secured loans to manufacturing firms, and higher increase in firm investment and output after the introduction of the reform. Given these results, the authors make the case that an efficient judiciary is a necessary precondition for firms to benefit from financial reforms.

In India, Chemin (2009) examines the effects of judicial trial duration on credit markets, agricultural development, and manufacturing performance, using measures of procedural complexity of judicial institutions as instruments. The author finds that slower judiciaries reduce access to credit markets in the agriculture sector, leading to depressed agricultural outputs. In addition, contractintensive sectors of the economy, such as registered manufacturing, are negatively affected by weak judiciaries. Thus, these papers suggest that improvements in legal enforcement of contracts would result in a significant increase in the availability of credit and, as a result, spur economic outcomes.

Judicial efficiency also affects interest rate spread across countries, as shown by Laeven and Majnoni (2005). The paper uses a measure of the ex-ante cost of bank credit to study the relationship between judicial efficiency and the cost of financial intermediation. The authors find that judicial efficiency is an important determinant of interest rate spreads across countries. They suggest that improvements in judicial efficiency and judicial enforcement of debt contracts are critical to lowering ness to lend. Shvets (2013) studies whether the creditor’s willingness to lend to a firm is affected by the quality of courts that protect the creditor’s rights. The author analyzes loans to 11,000 Russian firms between 1996 and 2002. Court quality is measured through the share of the court’s decisions appealed. Using panel data regressions and matching firms and courts, the authors find that creditors make more loans when their rights are protected by courts with lower appeal rates.

Visaria (2009) evaluates a mechanism to improve the functioning of credit markets, India’s Debt Recovery Tribunal (DRT). The author uses staggered roll out in the establishment of the Debt Recovery Tribunal–an alternate contract enforcement system to the existing judicial system of courts–across India and a minimum claim amount by the lender to study the effect on debt recovery, delinquency and, finally, the cost of credit for Indian firms using difference-in-differences. The author finds that DRT increases the probability of timely payment of loan installment by 28 percentage points.

Nonetheless, as previously mentioned, the credit market consequences of justice may be heterogeneous. For instance, Kranton and Swamy (1999) study the impact of the introduction of civil courts in colonial India on agricultural credit markets. The introduction of courts increased competition among lenders. However, it lowered farmers’ welfare by reducing the lenders’ ability to underwrite farmers’ investments during bad shocks. Horioka and Sekita (2011) use a panel survey of consumers in conjunction with judicial data by court district in Japan to estimate that better judicial enforcement increases the probability of being rationed in some cases and decreases loan size (contrary to expectation) but increases the probability of bankruptcy (as expected). Thus, the authors argue that better judicial enforcement facilitates the recovery of loans but may sometimes be socially harmful.

In addition, Besley, Burchardi, and Ghatak (2012) examine the effects of improving property rights to facilitate the use of fixed assets as collateral, as has been posited in much of the finance and credit markets literature. Using a structural model on Sri Lankan data, they find that the effects are nonlinear and heterogeneous based on borrower wealth, which in turn, also depends on competitiveness in the credit markets. Their theory and evidence suggest that there might be significant effects on interest rates and profits from improving property rights. However, these appear to come mostly from increased effort rather than increased levels of borrowing. Using the context of the 2009 DRT