The Real Effects of Judicial Enforcement*
Vincenzo Pezone
Review of Finance, 2023, vol. 27, issue 3, 889-933
Abstract:
This article shows that judicial enforcement has substantial effects on firms’ decisions with regard to their employment policies. To establish causality, I exploit a reorganization of the court districts in Italy involving judicial district mergers as a shock to court productivity. I find that an improvement in enforcement, as measured by a reduction in average trial length, has a large, positive effect on firm employment. The cross-sectional heterogeneity of the results suggests that stronger enforcement reduces financing constraints, boosting employment as a result, especially in firms characterized by higher complementarity between labor and capital. Moreover, in the presence of stronger enforcement, firms can raise more debt to dampen the impact of negative shocks and, in this way, reduce employment fluctuations. Consistent with this result, worker-level evidence shows that strong enforcement reduces the likelihood of unemployment.
Keywords: Law and Finance; Labor and Finance; Judicial Enforcement; Implicit Contracts (search for similar items in EconPapers)
JEL-codes: G30 J23 J41 K41 (search for similar items in EconPapers)
Date: 2023
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