Type: Job Market Paper, 2019
Courts are considered as an important institution in the functioning of markets. Yet, there is limited causal evidence showing this relationship. This paper estimates the causal effects of court performance on formal sector firm growth. I construct a robust measure of court performance using novel data comprising of the universe of 6 million case records over 9 years across 195 district courts in India and then match it to a dataset on registered, formal sector firms. For causal inference, I exploit plausible exogenous variation in judge occupancy, arising out of a system of rotating transfers of judges and existing vacancies, to instrument for the potentially endogenous court performance. I show that higher court performance positively affects lending behavior in local credit markets. This is because timely resolution of litigation supports lenders and acts as a deterrent against non-repayment to borrower firms. This, in turn, relaxes the credit constraints firms face, expanding production and improving profits.