Law and Finance Matter: Lessons from Externally Imposed Courts
Review of Financial Studies, 30 (3), March 2017, pp. 1019–1051.
52 Pages Posted: 10 Jun 2014 Last revised: 10 Mar 2020
Date Written: November 9, 2015
This paper provides novel evidence on the real and financial market effects of legal institutions. Our analysis exploits persistent and externally imposed differences in court enforcement that arose when the U.S. Congress assigned state courts to adjudicate contracts on a subset of Native American reservations. Using area-specific data on small business and household credit, reservations assigned to state courts, which 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 per capita income, with stronger effects in sectors that depend more on external financing.
Keywords: law and finance, courts, small business credit, credit markets, contract enforcement, Native American reservations
JEL Classification: G21, K40, P48
Suggested Citation: Suggested Citation