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Legal Reform, Contract Enforcement and Firm Size in Mexico

Listed author(s):
  • Sean Dougherty


Legal systems provide the basic institutions for firms and markets to operate. Their quality can have important consequences on the size distribution of firms, who rely on them for contract enforcement. This paper uses the variation in legal system quality across states in Mexico to examine the relationship between judicial quality and firm size. Although the country has a single legal system, its implementation and procedures vary widely, while development outcomes there are more imbalanced and unequal than in any other country of the OECD. The effect of the legal system on inter-state firm efficiency is therefore examined. Building on Laeven and Woodruff (2007), this study uses economic census microdata and contract enforcement ratings to examine the impact of state-level legal institutions on firm and industrylevel outcomes. A robust effect of judicial quality is observed on the firm size distribution and efficiency, instrumenting for underlying historical determinants of institutions. Indicative evidence is found that the effect is strongest in more capital-intensive industries. Market size and distance-to-market are also found to matter for firm size outcomes, consistent with the new trade literature. La réforme juridique, la mise en application des contrats et la taille des entreprises au Mexique Les systèmes juridiques fournissent les institutions de base pour que les entreprises et les marchés fonctionnent. La qualité du système juridique peut avoir des conséquences importantes sur la distribution de la taille des entreprises. Ces mêmes entreprises comptent sur le système juridique pour la mise en application des contrats. Cet article utilise la variation de la qualité du système juridique dans tous les États du Mexique pour examiner la relation entre la qualité judiciaire et la taille des entreprises. Bien que le pays dispose d’un système juridique unique, sa mise en oeuvre et les procédures varient considérablement, tandis que les résultats de développement y sont plus déséquilibré et inégal que dans n’importe quel autre pays de l'OCDE. L’effet du système juridique sur l’efficacité des entreprises interétatique est donc examiné. S'appuyant sur les travaux de Laeven et Woodruff (2007), cette étude utilise les microdonnées du recensement économique et les notes sur la mise en application des contrats pour examiner l’impact des institutions juridiques étatiques sur l’entreprise et les résultats au niveau de l’industrie. Un effet significatif de la qualité judiciaire est observé sur la distribution de la taille des entreprises et leur efficacité, en instrumentation pour les déterminants sous-jacents historiques des institutions. Nous trouvons également que l’effet est plus important dans les industries à forte intensité de capital. La taille du marché et la distance aux marchés sont également influents sur les résultats de la taille de l’entreprise, conforme à la nouvelle littérature sur le commerce.

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Paper provided by OECD Publishing in its series OECD Economics Department Working Papers with number 1042.

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Date of creation: 11 Apr 2013
Handle: RePEc:oec:ecoaaa:1042-en
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