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Contract enforcement, litigation, and economic development

  • Massenot, Baptiste
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    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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    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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    1. Gennaioli, Nicola, 2011. "Optimal Contracts with Enforcement Risk," CEPR Discussion Papers 8405, C.E.P.R. Discussion Papers.
    2. Nicola Gennaioli & Enrico Perotti, 2009. "Standardized enforcement: Access to justice vs contractual innovation," Economics Working Papers 1329, Department of Economics and Business, Universitat Pompeu Fabra, revised Jun 2012.
    3. Murphy, Kevin M & Shleifer, Andrei & Vishny, Robert W, 1991. "The Allocation of Talent: Implications for Growth," The Quarterly Journal of Economics, MIT Press, vol. 106(2), pages 503-30, May.
    4. Massenot Baptiste, 2010. "Financial Development in Adversarial and Inquisitorial Legal Systems," Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP) 10.13, Université de Lausanne, Faculté des HEC, DEEP.
    5. Luca Anderlini & Leonardo Felli & Giovanni Immordino & Alessandro Riboni, 2011. "Legal Institutions, Innovation and Growth," CESifo Working Paper Series 3489, CESifo Group Munich.
    6. Lopez-de-Silanes, Florencio & La Porta, Rafael & Shleifer, Andrei, 2008. "The Economic Consequences of Legal Origins," Scholarly Articles 2962610, Harvard University Department of Economics.
    7. Katz, Avery, 1988. "Judicial decisionmaking and litigation expenditure," International Review of Law and Economics, Elsevier, vol. 8(2), pages 127-143, December.
    8. Bond Philip, 2009. "Contracting in the Presence of Judicial Agency," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 9(1), pages 1-34, November.
    9. Paolo Buonanno & Matteo M. Galizzi, 2009. "Advocatus, et non latro? Testing the supplier-induced demand hypothesis for Italian courts of justice," Working Papers 0914, University of Brescia, Department of Economics.
    10. Rui Castro & Gian Luca Clementi & Glenn MacDonald, 2004. "Investor Protection, Optimal Incentives, and Economic Growth," The Quarterly Journal of Economics, MIT Press, vol. 119(3), pages 1131-1175, August.
    11. Massenot, Baptiste, 2010. "Financial development in adversarial and inquisitorial legal systems," MPRA Paper 27098, University Library of Munich, Germany.
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