Type: Job Market Paper, 2019
This paper provides the first causal evidence of court productivity on firm production using novel data comprising of 6 million case records across 195 court districts in India over 9 years along two margins. First, I show that court productivity, measured as the rate of case resolution as a percentage of annual caseload, has an “institutional” effect on the overall business environment by reducing transaction cost frictions. Second, courts also have direct effects on firms engaged in litigation through the length of the litigation process itself, or what I term as the “opportunity” cost effect. For demonstrating the first set of effects as causal, I exploit plausible exogenous variation in judge occupancy, arising out of a system of rotating transfers of judges and increasing vacancy, to instrument for endogenous court productivity. To demonstrate the direct effects, I make use of deterministic rules that define the jurisdiction of a case, showing that they are orthogonal to the firms outcomes prior to case filing. Finally, I provide suggestive evidence showing that court productivity enhances the effectiveness of legal reforms. In other words, the effects of any welfare enhancing policy or legislative reforms are limited by low court productivity. Therefore, policy solutions centered around legislative changes to promote economic development should also focus on improving court productivity.