It's Easier to Contract Than to Pay: Judicial Independence and U.S. Municipal Default in the 19th Century
55 Pages Posted: 4 May 2017 Last revised: 27 Apr 2018
Date Written: April 2018
It is well established in the literature that an independent judiciary can act as a signal of credibility by a sovereign state and as a guarantor of creditor rights. However, to date there has been little systematic work analyzing how an independent judiciary reacts to fiscal stress and public-sector default. This article addresses that very question by evaluating how and if judicial independence affects default rates using US municipal data through the nineteenth century. Overall, the results do indicate that greater judicial independence is associated with a significantly lower likelihood of default. This channel largely occurs through the method by which a member of a state’s court of last resort is selected (either appointment or popular election) and term length.
Keywords: Judicial Independence, Default, State and Local Public Finance, Judicial Selection, Courts, Credible Commitment
JEL Classification: H12, H73, H74, N21, P48
Suggested Citation: Suggested Citation