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Court efficiency and aggregate productivity: the credit channel

Guzmán González-Torres () and Giacomo Rodano ()
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Guzmán González-Torres: Bank of Italy
Giacomo Rodano: Bank of Italy

No 1287, Temi di discussione (Economic working papers) from Bank of Italy, Economic Research and International Relations Area

Abstract: Credit contract enforcement influences financial market allocations and prices. Well-functioning credit markets enable firms to finance their operations. Can greater judicial efficiency therefore help to improve credit market allocations, by increasing firm dynamism and boosting aggregate productivity? We build a dynamic model of heterogeneous firms with short-term liquidity needs, in which two key features of enforcing credit contract proceedings, case resolution time and the expected recovery rate, directly affect credit supply. Once calibrated to replicate Italian firm dynamics, we use the model to analyze the extent to which court efficiency determines aggregate outcomes through the credit channel. In our economy, either increasing the average recovery rate on defaulted loans from 62 to 80 per cent, or reducing case resolution time from 9 to 5 years, raises average firm productivity by about 2 per cent. These gains are attained through a substantial improvement in the allocation of resources across firms.

Keywords: financial markets; civil law; contracts; aggregate productivity; intertemporal firm choice (search for similar items in EconPapers)
JEL-codes: D25 E44 K12 K15 O47 (search for similar items in EconPapers)
Date: 2020-07
New Economics Papers: this item is included in nep-bec, nep-eff, nep-law and nep-mac
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