Judicial Efficiency and Economic Growth: Evidence based on EU data

Rizos, Anastasios and Kapopoulos, Panayotis (2021): Judicial Efficiency and Economic Growth: Evidence based on EU data.

Abstract

The growth-enhancing property of a well-functioned judicial system is documented on the back of the safeguarding of property rights and legal investor protection, the well-functioning of financial markets, the support to entrepreneurship and the upholding of the firm growth. We investigate the effects of judicial efficiency on economic growth, using a new dataset over the period 2010-2018 drawn by the EU Justice Scoreboard study. More specifically, we estimate a static growth equation controlling for alternative judicial efficiency measures. Our findings corroborate that the inefficiencies in the operation of judicial systems pose obstacles to economic growth, and consequently, positive developments in judicial efficiency can be growth enhancing. Specifically, inefficiencies in the operation of judicial systems, measured alternatively as (a) lengthier court proceedings, (b) lower rates of clearance of accumulated unresolved cases, (c) increasing burden of pending cases and (d) a high inflow of new cases, all undermine economic growth. Our results justify the further adoption of judicial reforms in European Union members, that strengthen the enforcement of private contracts, incentivizing the domestic and external investment decisions and supporting the European economies to achieve and sustain robust growth rates. Finally, we find that civil origin legal systems, which are characterized by a higher degree of formalism in judicial procedures relative to common law origin systems, hinder economic growth.

• Item Type: MPRA Paper
• Language: English
• Keywords: judicial efficiency, economic growth, disposition time, clearance rate, caseload
• Subjects: C - Mathematical and Quantitative Methods > C2 - Single Equation Models ; Single Variables > C23 - Panel Data Models ; Spatio-temporal Models; C - Mathematical and Quantitative Methods > C2 - Single Equation Models ; Single Variables > C26 - Instrumental Variables (IV) Estimation; K - Law and Economics > K4 - Legal Procedure, the Legal System, and Illegal Behavior > K40 - General; O - Economic Development, Innovation, Technological Change, and Growth > O4 - Economic Growth and Aggregate Productivity > O43 - Institutions and Growth

References

Acemoglu, D., S. Johnson and J. Robinson (2005): Institutions as the Fundamental Cause of Long-run Growth, in P. Aghion and S. Durlauf (eds.), Handbook of Economic Growth (Amsterdam: North-Holland).

Acemoglu, D. and J. Robinson (2012): Why Nations Fail? The Origins of Power, Prosperity and Poverty.

Arellano, M. And S. Bond (1991): Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations, Review of Economic Studies, 58, 277-297.

Arellano, M. And O. Bover (1995): Another Look at the Instrumental Variable Estimation of Error Component Models, Journal of Econometrics, 68, (1), 29-51.

Bae, K. H. and V. K. Goyal (2009): Creditor rights, enforcement, and bank loans. Journal of Finance, 64(2), 823–860

Barro, R. (2003): Determinants of Economic Growth in a Panel of Countries, Annals of Economics and Finance, 4, 231-274.

Beck, T., A. Demirguc-Kunt, and V. Maksimovic (2006): The Influence of Financial and Legal Institutions on Firm Size, Journal of Banking & Finance: 2995–3015.

Bellani, M. (2014): Judicial Efficiency and Foreign Direct Investments: Evidence from OECD countries, Mimeo.

Benassy-Quere, A., M. Coupet and T. Mayer (2007): Institutional Determinants of Foreign Direct Investment, The World Economy, 30 (5), 764-782.

Beenstock, M., and Y. Haitovsky (2004): Does the appointment of judges increase the output of the judiciary? International Review of Law and Economics, 24(3), 351–369.

Buonanno, P. and M.M. Galizzi (2010): Advocatus, et non latro? Testing the Supplier-Induced-Demand Hypothesis for Italian Courts of Justice. Working Papers 2010.52, Fondazione Eni Enrico Mattei.

Buscaglia, E. and M. Dakolias (1999): Comparative International Study of Court Performance Indicators, Legal and Judicial Reform Series, World Bank Publications and Research on Law and Justice Institutions, available at http://www.worldbank.org/external/default/WDSContentServer/WDSP/IB/2000/08/04/000094946_0 0072605391760/Rendered/PDF/multi_page.pdf.

Buscaglia, E. and T. Ulen (1997): A quantitative assessment of the efficiency of the judicial sector in Latin America. International Review of Law and Economics, 17(2), 275–291.

Carmignani, A. and S. Giacomelli (2010): Too many lawyers? Litigation in Italian civil courts. Temi di discussione (Working Papers) 745. Banca d’Italia.

Christensen, R. K., and J. Szmer (2012): Examining the efficiency of the U.S. courts of appeals: Pathologies and prescriptions. International Review of Law and Economics, 32(1), 30–37.

Di Vita, G. (2010): Production of laws and delays in court decisions. International Review of Law and Economics, 30(3), 276–281.

Djankov, S., R. La Porta, F. Lopez-de-Silanes and A. Shleifer (2003): "Courts", Quarterly Journal of Economics, 453-517.

Djankov, S., O. Hart, C. McLiesh and A. Shleifer (2008): Debt Enforcement Around the World, Journal of Political Economy, 116(6): 1105-49.

Dori, A. (2015): The EU Justice Scoreboard – Judicial Evaluation as a New Governance Tool, Max Planck Institute Luxembourg, Working Paper (2).

Fabbri, D. (2010): Law Enforcement and Firm Financing: Theory and Evidence, Journal of the European Economic Association, 8(4): 776-816.

Feld, L. and S. Voigt (2003): Economic Growth and Judicial Independence: Cross Country Evidence Using a New Set of Indicators, European Journal of Political Economy 19: 497–527.

Hayo, B. and S. Voigt (2008): The Relevance of Judicial Procedure for Economic Growth, CESifo Working Paper Νο. 2514.

García-Posada, M. and J.S. Mora-Sanguinetti (2013): Firm Size and Judicial Efficacy: Evidence for the new civil procedures in Spain. Documentos de Trabajo 1303. Banco de España.

Garoupa, N., N. Jorgensen and P. Vazquez (2010): Assessing the Argument for Specialised Courts: Evidence from Family Courts in Spain, International Journal of Law, Policy and the Family, 24 (1): 54-66.

Giacomelli, S. and C. Menon (2013): Firm Size and Judicial Efficiency in Italy: Evidence from the Neighbour's Tribunal, Temi di discussione (Working Papers) 898. Banca d’Italia.

Ippoliti, R., Melcarne, A., and G. B. Ramello (2015): Judicial efficiency and entrepreneurs’ expectations on the reliability of European legal systems, European Journal of Law and Economics, 40(1), 75–94.

Jappelli, T., M. Pagano and M. Bianco (2005): Courts and Banks: Effects of Judicial Enforcement on Credit Markets, Journal of Money Credit and Banking, 37(2): 223-244.

Kumar, B., R. Rajan and L. Zingales (2001): What Determines Firm’s Size, NBER Working Paper 7208.

Laeven, L. and C. Woodruff (2007): The Quality of the Legal System, Firm Ownership and Firm Size, The Review of Economics and Statistics, 89: 601-614.

La Porta, R., F. Lopez-de-Silanes, A. Shleifer, and R. Vishny (1999): The Quality of Government, Journal of Law, Economics, and Organization 15: 222–279.

LaPorta, R., F. Lopez-de-Silanes, and A. Shleifer (2008): The Economic Consequences of Legal Origins, Journal of Economic Literature, 46 (2), 285-332.

Levine, R. (1998): The Legal Environment, Banks and Long-Run Economic Growth, Journal of Money, Credit and Banking, 30 (3), 596-613.

Levine, R. (2005): Law, Endowments and Property Rights, Journal of Economic Perspectives, 19 (3), 61-88.

Lorizio, M. and A.R. Gurrieri (2014): Efficiency of Justice and Economic Systems, Procedia Economics and Finance, 17, 104-112.

Nickel, S. (1981): Biases in Dynamic Models with Fixed Effects, Econometrica, Vol. 49 (6), 1417-1426.

Palumbo, G., Giupponi, G., Nunziata, L., and J. Mora-Sanguinetti (2013): The Economics of Civil Justice: New Cross-country Data and Empirics, OECD Economics Department Working Paper, No. 1060.

Qian, J. and P. Strahan (2007): How Law and Institutions Shape Financial Contracts: The Case of Bank Loans, Journal of Finance, 62(6), 2803–2834.

The 2020 EU Justice Scoreboard, European Commission, July 2020.

Voigt, S. and N. El Bialy (2012): Identifying the Determinants of Judicial Performance: Taxpayers’ Money Well Spent? Working Paper