A recent IMF working paper has an interesting summary of the latest empirical evidence on the channels linking the judicial system and growth :
Development of credit markets and cost of credit. Weak contract enforcement raises the cost of borrowing, and shortens loan maturities (Bae and Goyal, 2009; Laeven and Majnoni, 2003), with a detrimental impact on investment, the depth of mortgage markets, and GDP (Bianco et al., 2002; Laeven et al., 2003; Djankov et al., 2008).
Firm size. The literature also finds a positive correlation between the quality of the judicial system and firm size (Kumar et al. 2001, Beck et al. 2006). Weak incentives to invest and hire workers under uncertain contract enforcement and costly dismissal procedures are two factors that could explain this correlation. Italy certainly fits the pattern: SMEs account for nearly 70 percent of value added and, as discussed above, the judicial system is inefficient along many dimensions. Giacomelli and Menon (2012) use differences in court efficiency across Italian municipalities to establish a causal link and estimate that halving the length of civil proceedings could increase average firm size by 8-12 percent. Beyond firm size, rates of firm creation and destruction also suffer from court inefficiencies (Garcia-Posada and Mora-Sanguinetti 2012).
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