Can Lawyers Help Promote Economic Growth? Effects of Contract-Enforcement Efficiency on Private Capital Investment

Abstract

Economists are fairly unanimous in the belief that a country's institutional environment plays a significant role in determining its prospects for economic development. This view derives both from economic theory and from an increasingly robust set of empirical findings. The strengthening economic consensus has led to significant investments in institution-building on the part of development donors, including the World Bank. But many who study and practice in this area remain less than fully satisfied with our existing level of understanding. In particular, although the macro-level evidence is very robust, there is relatively less empirical research identifying the specific pathways that link institutions to economic development. In this paper, I add to the empirical foundations of institutional-reform efforts by focusing narrowly on one aspect of institutions--the efficiency of contract-enforcement, in terms of duration and procedural complexity--and estimating its impact on one factor of growth: private capital investment. I hypothesize that relatively more efficient judicial systems will be associated with higher levels of investment, as firms will be able to benefit from contract-enforcement institutions at a lower cost. My regression analyses generally confirm this hypothesis, although I acknowledge that the results are subject to alternative interpretations and, therefore, should be taken with caution. I conclude that developing countries might spur private capital formation by addressing sources of judicial inefficiency, including long delays and unnecessary procedures.