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Court efficiency and aggregate productivity: the credit channel

Author

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  • Guzmán González-Torres

    (Bank of Italy)

  • Giacomo Rodano

    (Bank of Italy)

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.

Suggested Citation

  • Guzmán González-Torres & Giacomo Rodano, 2020. "Court efficiency and aggregate productivity: the credit channel," Temi di discussione (Economic working papers) 1287, Bank of Italy, Economic Research and International Relations Area.
    • Handle: RePEc:bdi:wptemi:td_1287_20
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    2. Giacomo Rodano, 2021. "Judicial efficiency and bank credit to firms," Temi di discussione (Economic working papers) 1322, Bank of Italy, Economic Research and International Relations Area.

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    More about this item

    Keywords

    financial markets; civil law; contracts; aggregate productivity; intertemporal firm choice;
    All these keywords.

    JEL classification:

    • D25 - Microeconomics - - Production and Organizations - - - Intertemporal Firm Choice: Investment, Capacity, and Financing
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • K12 - Law and Economics - - Basic Areas of Law - - - Contract Law
    • K15 - Law and Economics - - Basic Areas of Law - - - Civil Law; Common Law
    • O47 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Empirical Studies of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence

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