Economic Consequences of Judicial Institutions: Evidence from a Natural Experiment
41 Pages Posted: 24 Jul 2011 Last revised: 28 May 2014
Date Written: May 17, 2014
This paper studies the effects of judicial institutions on investment and employment using an industry-by-industry approach, and the legal context of American Indian reservations. Based on variation in legal institutions from a quasi natural experiment, more consistent court adjudication leads to greater employment and more establishments among high-sunk-cost industries while having minimal effects on low-sunk-cost industries. The heterogeneity in effects across industries is consistent with the hypothesis that better-understood courts overcome a potential hold-up problem in contract negotiations. Moreover, these investments exhibit economically-important spillovers to related industries that are unaffected by the law: in particular, Indian casinos. Beyond American Indian reservations, these findings suggest broad and wide-reaching effects of the nature of court systems on economic activity.
Keywords: judicial institutions, American Indian reservations, Public Law 280
Suggested Citation: Suggested Citation