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Contract enforcement, litigation, and economic development

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  • Massenot, Baptiste
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    Abstract

    This paper introduces a model of litigation in a growth framework. Investors use litigation to enforce their financial contracts with entrepreneurs. A contest ensues in which both agents hire lawyers to increase their probability of winning the trial. The issue and the cost of the contest determine how much investors are willing to lend. More lawyers are hired when judicial efficiency is lower and damages are higher. Higher judicial efficiency and tighter restrictions on the supply of lawyers benefit the economy, while the impact of higher damages is ambiguous. Some empirical evidence is also presented.

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    File URL: http://mpra.ub.uni-muenchen.de/27501/
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    Bibliographic Info

    Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 27501.

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    Date of creation: Dec 2010
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    Handle: RePEc:pra:mprapa:27501

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    Keywords: contract enforcement; litigation; lawyers; economic development;

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    1. Lopez-de-Silanes, Florencio & La Porta, Rafael & Shleifer, Andrei, 2008. "The Economic Consequences of Legal Origins," Scholarly Articles 2962610, Harvard University Department of Economics.
    2. Anderlini, Luca & Felli, Leonardo & Immordino, Giovanni & Riboni, Alessandro, 2011. "Legal Institutions, Innovation and Growth," CEPR Discussion Papers, C.E.P.R. Discussion Papers 8433, C.E.P.R. Discussion Papers.
    3. Kevin M. Murphy & Andrei Shleifer & Robert W. Vishny, 1990. "The Allocation of Talent: Implications for Growth," NBER Working Papers 3530, National Bureau of Economic Research, Inc.
    4. Gennaioli, Nicola, 2011. "Optimal Contracts with Enforcement Risk," CEPR Discussion Papers, C.E.P.R. Discussion Papers 8405, C.E.P.R. Discussion Papers.
    5. Katz, Avery, 1988. "Judicial decisionmaking and litigation expenditure," International Review of Law and Economics, Elsevier, Elsevier, vol. 8(2), pages 127-143, December.
    6. Rui Castro & Gian Luca Clementi & Glenn MacDonald, 2004. "Investor Protection, Optimal Incentives, and Economic Growth," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 119(3), pages 1131-1175, August.
    7. Bond Philip, 2009. "Contracting in the Presence of Judicial Agency," The B.E. Journal of Theoretical Economics, De Gruyter, De Gruyter, vol. 9(1), pages 1-34, November.
    8. Nicola Gennaioli & Enrico Perotti, 2012. "Standardized Enforcement: Access to Justice vs. Contractual Innovation," Working Papers 652, Barcelona Graduate School of Economics.
    9. Massenot Baptiste, 2010. "Financial Development in Adversarial and Inquisitorial Legal Systems," Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP), Université de Lausanne, Faculté des HEC, DEEP 10.13, Université de Lausanne, Faculté des HEC, DEEP.
    10. Massenot, Baptiste, 2010. "Financial development in adversarial and inquisitorial legal systems," MPRA Paper 27098, University Library of Munich, Germany.
    11. Paolo Buonanno & Matteo M. Galizzi, 2009. "Advocatus, et non latro? Testing the supplier-induced demand hypothesis for Italian courts of justice," Working Papers, University of Brescia, Department of Economics 0914, University of Brescia, Department of Economics.
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