Court Quality and Economic Resilience

Abstract

We investigate how court quality affects the transmission of shocks across firms. Using novel inter-firm wire transfer data, we find that suppliers exposed to natural disasters pass this shock to their customers, particularly when the court system is congested. Evidence suggests that congested courts amplify spillovers through the contracting frictions that customers face with new suppliers and creditors. Subsequently, customers vertically integrate the production of affected inputs and obtain liquidity by selling their accounts receivables. Our results highlight the importance of institutions in facilitating economic resilience.

Keywords: courts, economic fragility, contract enforcement, networks, propagation

JEL Classification: D02, E02, L14, E23, E32