Economic Resilience: Spillovers, Courts, and Vertical Integration
61 Pages Posted: 26 Feb 2020 Last revised: 25 Aug 2020
Date Written: August 24, 2020
We investigate the impact of institutions on 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 customer's court system is congested. Evidence suggests that congested courts amplify spillovers through potential future holdup problems: customers face frictions both in contracting with new suppliers and in obtaining bank credit. Subsequently, customers seem to 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
Suggested Citation: Suggested Citation