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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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    File URL: https://mpra.ub.uni-muenchen.de/27501/1/MPRA_paper_27501.pdf
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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. Luca Anderlini & Leonardo Felli & Giovanni Immordino & Alessandro Riboni, 2013. "Legal Institutions, Innovation, And Growth," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 54, pages 937-956, 08.
    2. Paolo Buonanno & Matteo M. Galizzi, 2010. "Advocatus, et non latro? Testing the Supplier-Induced-Demand Hypothesis for Italian Courts of Justice," Working Papers 2010.52, Fondazione Eni Enrico Mattei.
    3. Katz, Avery, 1988. "Judicial decisionmaking and litigation expenditure," International Review of Law and Economics, Elsevier, vol. 8(2), pages 127-143, December.
    4. Rafael La Porta & Florencio Lopez-de-Silanes & Andrei Shleifer, 2007. "The Economic Consequences of Legal Origins," NBER Working Papers 13608, National Bureau of Economic Research, Inc.
    5. 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.
    6. Nicola Gennaioli, 2013. "Optimal Contracts With Enforcement Risk," Journal of the European Economic Association, European Economic Association, vol. 11(1), pages 59-82, 02.
    7. Rui Castro & Gian Luca Clementi & Glenn MacDonald, 2004. "Investor Protection, Optimal Incentives, and Economic Growth," The Quarterly Journal of Economics, Oxford University Press, vol. 119(3), pages 1131-1175.
    8. 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.
    9. Massenot, Baptiste, 2010. "Financial development in adversarial and inquisitorial legal systems," MPRA Paper 27098, University Library of Munich, Germany.
    10. 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.
    11. 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.
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