Justice Delayed is Growth Denied: the Effect of Slow Courts on Relationship-specific Industries in India

Abstract: Are well-functioning formal judicial institutions important for growth? Some argue that they are needed to ensure efficient contract enforcement, while others argue that informal contracting arrangements such as relational contracts, social norms or kinship networks can provide workable substitutes. One explanation for the continued lack of clarity is that most of the previous empirical work on this topic has taken place in a cross-country setting, in which it is difficult to find objective, comparable measures of judicial efficiency and endogeneity concerns are uppermost. In contrast, this paper studies the effect of court efficiency on economic growth in a within-country setting. The setting is that of district courts in India, a country with infamously slow courts on average and significant variation in court speed by state. The identification strategy is motivated by theory from the incomplete contracting literature, in which it is argued that transactions involving relationship-specific investments are more exposed to post-contractual opportunism and hence have greater need for efficient contract enforcement. Using state level variation in an objective measure of court speed and industry level variation in relationship-specificity from Nunn (2007), I show that the interaction between state level court efficiency and industry level relationship-specificity is highly predictive of future growth in the registered manufacturing sector. Focusing on the interaction and including state and industry fixed effects makes it more difficult to argue that the results are driven by omitted variables. Nevertheless, I conduct a number of robustness checks and placebo tests to systematically rule out other potential explanations and provide additional confidence in the hypothesized mechanism. For example, one such placebo test demonstrates that it is only the efficiency of civil courts, not criminal courts that is a significant predictor of future growth.