nations we study, regions, rather than countries, might be the best unit of analysis for conducting reform aimed at improving transactional mechanisms.

# **V.2 Attitudes Towards Courts**

We examine two standard questions that appear in every WBES and have often been used as measures of court performance. The first ("fair-court") asks whether the respondent agrees or disagrees with the statement "the court system is fair, impartial and uncorrupted". The second asks whether the courts are an obstacle to the current operations of the firm ("court-as-obstacle").

Figures 3a and 3b show the patterns in the data. On the suppliers’ side, consistent with our intuition, firms considering the court fair are more likely to employ governance structures with a stronger legal element. This relation is weaker on the customers’ side, where there is little association between attitudes about the courts and the use of the law. The conclusion is that the fair-court question is not a reliable indicator of a firm's commitment to a legally-oriented governance strategy.

For the court-as-obstacle question, the firms that do not consider the court as an obstacle are the least likely to rely on the legal system. In contrast, as the assessment of the court as an obstacle increases, there is more reliance on governance mechanisms that involve legal systems. If one viewed this question as a measure of court quality, one would expect exactly the opposite association.<sup>30</sup> The most likely explanation of this apparent paradox is reverse causality: if firms do not choose to use the legal system, then the courts are not an obstacle. The firms that need the legal system are more likely to be hindered by its flaws. That is, the interpretation of answers to this court-as-obstacle question in the literature seems to be diametrically opposite to what it actually reflects. Our conclusion here is consistent with observations on data on Russia's early transition made by Hendley et al. (2000) and explored thoroughly in papers by Hendley (2016; 2017): because going to court is inherently an unpleasant experience, attitudes to the courts are not good predictors of the use of the law.

# **V.3 Interactions with Business Associations**

Figures 4a and 4b illustrate the correlation between business membership and governance structures. In all cases, firms with stronger ties to business associations are more likely to rely on bilateralism with private support. But, as shown in Tables 4a and 4b, this observation is backed by only weak statistical support, and only on the customer side. Perhaps what the data is showing here is that business associations are important in somewhat niche activities within

> <sup>30</sup> Gutmann and Voigt (2017) use the courts-as-obstacles question as a dependent variable that is viewed as a proxy for the quality of the courts.  See also the following from World Bank (2014) on survey results for the Kyrgyz Republic: "Courts are perceived as one of the least problematic areas for doing business...In 2013, only 13 percent of firms saw courts as a problem, and only 4 percentage points of respondents saw it as major or very severe problem.... This is a significant improvement compared to 2008 when 60 percent of firms saw courts as a problem and 29 percent saw them as a major/severe problem."  Note that over the same period, there were declines in the percentages of firms believing that the court system is fair, impartial, and uncorrupted, quick, and able to enforce its decisions.

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