Economic Consequences of Judicial Institutions: Evidence from a Natural Experiment
Abstract: This paper studies the effects of judicial institutions on investment and employment using an industry-by-industry approach, combined with the legal context of American Indian reservations. Using variation in legal institutions from a quasi natural experiment, better-understood courts lead 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. Beyond American Indian reservations, these findings suggest broad and wide-reaching effects of the nature of court systems on economic activity.
