This paper presents an incomplete contracting model to show how judicial corruption and judicial favoritism can lead to distortions in agents' incentives to invest in relation-specific assets and cause inefficiency. I also show that while an increase in the judge's income always increases investment, it is possible that a strongly favoritism-reducing increase in the authority's propensity to monitor the judiciary can actually reduce, instead of increase, investment in equilibrium. The implications of these findings for the study of institutional reforms, the relationship between the institutional environment and institutional arrangements, and the political economy of connections are explored.
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Find related papers by JEL classification: D73 - Microeconomics - - Analysis of Collective Decision-Making - - - Bureaucracy; Administrative Processes in Public Organizations; Corruption K42 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - Illegal Behavior and the Enforcement of Law L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation O12 - Economic Development, Technological Change, and Growth - - Economic Development - - - Microeconomic Analyses of Economic Development
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