Credit Markets and Economic Activity: Evidence from Exogenous Variation in Legal Institutions
James R. Brown
Iowa State University - Department of Finance
J. Anthony Cookson
University of Colorado at Boulder - Leeds School of Business
Brandeis University - International Business School
July 18, 2014
This paper provides novel evidence on the causal link between credit markets and real economic activity. Our analysis exploits quasi-experimental variation in legal contract enforcement across Native American reservations arising from Public Law 280, wherein the US Congress externally assigned state courts to adjudicate contracts on a subset of reservations. According to area-specific micro-level data on household and small business credit, reservations assigned to state courts, which tend to enforce contracts more predictably than tribal courts, have stronger credit markets. Moreover, the law-driven component of credit market development is associated with significantly higher levels of per capita income, with stronger effects in sectors that depend more on external financing. By using exogenous variation in legal institutions across relatively-similar sovereign entities, our study offers compelling evidence that better-developed credit markets lead to economically significant improvements to real activity.
Number of Pages in PDF File: 42working papers series
Date posted: June 10, 2014 ; Last revised: July 20, 2014
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