Courts are considered important in the functioning of markets, and yet, there is limited causal evidence showing this. In my dissertation, I explore the causal role of judicial institutions in facilitating economic development outcomes. In the first chapter of my dissertation, I estimate the causal effects of courts’ effectiveness in backlog resolution on formal sector firm outcomes, illustrating ex-post contract enforcement in local credit markets as an important channel. To show this, I construct a novel panel dataset on court-level variables from 6 million trial-level data across 195 district courts in India and exploit quasi-random variation in judge vacancy for causal identification. There are three key implications of this chapter. First, reducing marginal judge vacancy reduces court backlog by 6%. Second, this stimulates bank lending in local credit markets through improved liquidity from debt recoveries. Third, this affects credit availability, production, and profitability of firms located within the court’s jurisdiction. The results imply an 8:1 benefit to cost ratio of reducing marginal judge vacancy.

In the second chapter, I discuss the interaction between legal reforms in bankruptcy resolution and judicial capacity through the enforcement of creditor rights in trial courts on credit allocation in local markets. Poor creditor rights constrain the functioning of credit markets, that subsequently affects the availability of credit for productive uses. Can well-functioning courts facilitate the enforcement of creditor rights? How does this affect credit allocation? To study this, I use a difference in difference research design by comparing districts with high judge occupancy and those with low occupancy, before and after the 2016 national legislation on bankruptcy resolution in India that increased the rights of the creditors over stressed assets. There are three key findings. First, banks reduce lending towards unproductive uses such as lending to defaulting firms and increase lending based on capital efficiency in districts with better judicial capacity. Second, improved creditor rights coupled with better judicial capacity increases repayment. Third, banks are more likely to initiate and witness resolution of debt recovery related litigation in districts with better judicial capacity after the bankruptcy reform, suggesting that enforcement of creditor rights in well functioning trial courts plays an important complementary role. Finally, the chapter concludes by examining credit misallocation, showing that good quality formal institutions are insufficient to fully address existing misallocation.

How does judge vacancy affect trial-level and litigant outcomes? Emerging economies like India suffer from state capacity constraints that affect economic outcomes. While insufficiency in the number of public teachers and doctors in providing human capital development services has received increasing attention in economics, capacity constraints in the judiciary has rarely been discussed. In the third chapter, I examine the role of judge vacancy on the proceedings of ongoing trials and subsequent effects on litigant outcomes in India. The system of annual judge assignment to district courts shifts the existing high level of vacancies across courts that varies orthogonally to existing trial and litigant outcomes, enabling causal identification. There are following main findings: first, the duration of trial increases when an ongoing trial experiences judge vacancy relative to other trials in the same court that do not. Second, this shock negatively affects wage bill and decreases the asset value of plaintiff firms whereas the effects are smaller and statistically indistinguishable from zero for defendant firms. Third, the large negative effect for plaintiff firms is likely to occur due to increase in the number of dismissals resulting from vacancy. Given that smaller firms are more likely to use the formal judicial system as a plaintiff in the case of transactional disputes relative to larger firms, weaker judicial capacity disproportionately affects them leading to equity concerns.

Through these chapters, I show that judicial institutions play an important role in an economy. My approach to answering these macro questions involves using disaggregated and rich administrative data that enable me to shed light on the underlying mechanisms linking institutional quality and economic outcomes.