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Research on Enforcing Contracts

Doing Business considers the following list of papers as relevant for research on enforcing contracts. Some papers—denoted with an asterisk (*)—use Doing Business data for their empirical analysis. If we've missed any important research, please let us know.

Author(s): Philippe Aghion, Thibault Fally and Stefano Scarpetta

Journal: Economic Policy, Volume 22 Issue 52, Pages 731 - 779, 2007

Abstract: Advanced market economies are characterized by a continuous process of creative destruction. Market forces and technological developments play a major role in shaping this process, but institutional and policy settings also influence firms' decision to enter, to expand if successful and to exit if competition becomes unbearable. In this paper we focus on the effects of financial development on the entry of new firms and the expansion of successful new businesses. Drawing from harmonized firm-level data for 16 industrialized and emerging economies, we find that access to finance matters most for the entry of small firms and in sectors that are more dependent upon external finance. This finding is robust to controlling for other potential entry barriers (labour market regulations and entry regulations). On the other hand, financial development has either no effect or a negative effect on entry by large firms. Access to finance also helps new firms expand if successful. Both private credit and stock market capitalization are important for promoting entry and post-entry growth of firms. Altogether, these results suggest that, despite significant progress over the past decade, many countries, including those in Continental Europe, should improve their financial markets so as to get the most out of creative destruction, by encouraging the entry of new (especially small) firms and the post-entry growth of successful young businesses.

Author(s): Marco Antonio F.H. Cavalcanti

Journal: Journal of Macroeconomics, Volume 32, Issue 1, March 2010, Pages 118-144

Abstract: We investigate, both theoretically and empirically, the relationship between credit market imperfections and the degree of shock amplification arising from the so-called financial accelerator. We begin by simulating a dynamic stochastic general equilibrium model with two types of financial frictions-costly contract enforcement and anti-creditor bias in the judicial system. Our model builds on the standard financial accelerator framework of Bernanke et al. (1999), to which we add imperfect judicial enforcement in the line of Krasa and Villamil (2000). According to our simulations, the power of the financial accelerator may either increase or decrease with financial frictions, depending on the source and initial level of such frictions. We then turn to the empirical investigation, based on panel data for 62 countries over 1981?1999. We rely on Djankov et al. (2005) and the World Bank?s Doing Business Database for proxies of credit market imperfections. According to our results, which are consistent with the theoretical model?s main predictions, macroeconomic volatility and the power of the financial accelerator seem to increase with contract enforcement costs, but vary non-monotonically with the degree of anti-creditor bias in the judicial and legal system.

Author(s): Kee-Hong Bae and Vidhan K. Goyal

Journal: The Journal of Finance, Volume 64, Issue 2 (04), Pages:823-860, 2009

Abstract: We examine whether differences in legal protection affect the size, maturity, and interest rate spread on loans to borrowers in 48 countries. Results show that banks respond to poor enforceability of contracts by reducing loan amounts, shortening loan maturities, and increasing loan spreads. These effects are both statistically significant and economically large. While stronger creditor rights reduce spreads, they do not seem to matter for loan size and maturity. Overall, we show that variation in enforceability of contracts matters a great deal more to how loans are structured and how they are priced.

Author(s): Karen Macours

Journal: Journal of Comparative Economics

Abstract: This paper shows how ethnic diversity in a context of weak property rights enforcement can result in market segmentation. The paper analyzes how contract enforcement problems affect the joint decision of partner and contract choice by landlords in the land rental market in Guatemala. The empirical method allows partner choice to be determined not only by the characteristics and relative scarcity of the specific landowner and tenant, but also by the characteristics of other potential tenants. The results show that landowners without formal title are more likely to restrict their partners to tenants from the same ethnic group. Partner choice is found to be less important for renting with interlinked land?labor contracts.

Author(s): Ines Lindner, Holger Strulik

Journal: Jornal of Development Economics

Abstract:  This paper introduces the Small World model into the theory of economic growth and investigates how increasing economic integration affects firm size and efficiency, norm enforcement, and aggregate economic performance. When economic integration is low and local connectivity is high, informal norms control entrepreneurial behavior and more integration mainly improves search for investment opportunities. At a higher level of economic integration neighborhood enforcement deteriorates and formal institutions are needed to keep entrepreneurs in check. A gradual take-off to perpetual growth is explained by a feedback effect from investment to the formation of long-distance links and the diffusion of knowledge. If formal institutions are weak, however, the economy does not take off but stagnates at an intermediate income level. Structurally, the equilibrium of stagnation differs from balanced growth by the presence of many small firms with low productivity.

Author(s): Jonathan Levie, Erkko Autio, Zoltan Acs, Mark Hart

Journal: Small Business Economics

Abstract: This article is an introduction to the special issue from the 4th Global Entrepreneurship Monitor Research Conference held at Imperial College Business School, London, in 2010. The article has two objectives. The first is to summarize the history of the GEM consortium, some of the contributions that it has delivered, and some challenges and opportunities ahead. The second is to present a summary of the papers in the context of the utility of GEM data in comparative entrepreneurship research.

Author(s): Ahsan, Reshad N.

Journal: Journal of International Ecnomics, Volume 90, Issue 1, Pages 181-192, May 2013

Abstract: This paper extends the literature on trade liberalization and firm productivity (TFP) by examining the complementarities between the speed of contract enforcement and the productivity gains from input tariff liberalization. It does so by using firm-level panel data from India along with an objective measure of judicial efficiency at the state level. The results suggest that for a 10 percentage point decline in input tariffs, firms in the state at the 75th percentile of judicial efficiency gain an additional 3.6 percentage points in productivity when compared to firms in the state with the median level of judicial efficiency. The results also indicate that the complementarities are strongest for firms in industries that are contract intensive and imported-capital intensive. These results are robust to using a matching estimator to address the self-selection of firms into states with high judicial efficiency and an IV approach to instrument input tariffs. In addition, the results are also robust to the addition of state-year interaction fixed effects to control for time-varying, unobservable state characteristics. Thus, the results indicate that rapid contract enforcement is necessary to maximize the productivity benefits from input tariff liberalization. (C) 2012 Elsevier B.V. All rights reserved.

Author(s): Sergi Lanau 

Journal: IMF Working Paper

Abstract: The inefficiency of the Italian judicial system has contributed to reduced investments, slow growth and a difficult business environment. The enforcement of civil and commercial claims suffers from excessive delays in court proceedings, resulting in a very large number of pending cases. The Italian authorities have over the years taken steps to remove bottlenecks and speed up judicial proceedings. While these measures are generally steps in the right direction, more can be done. Consideration could be given, inter alia, to reviewing court fees, improving the new mandatory mediation scheme, strengthening court management, and reforming the appeal system.

Author(s): Samaniego, Roberto M.

Journal: International Journal of Industrial Organization, Volume 31, Issue 1, Pages 50-63, January 2013

Abstract: Knowledge spillovers are widely thought to be important for innovative activity, yet theory is ambiguous about the sign of the relationship. Assuming that knowledge spillovers are more easily exploited where intellectual property rights are weakly enforced, this paper uses country-industry data to uncover the link between knowledge spillovers and innovative activity, as well as the birth and death of enterprises. IPR enforcement disproportionately increases innovation spending in R&D intensive industries, as well as both rates of entry and exit. The results are robust to accounting for financial development, labor market ridigities and a number of other institutional factors.

Author(s): Erwan Quintin

Journal: Journal of Macroeconomics, Volume 30, Issue 3, Pages 1222-1245, September 2008

Abstract: This paper describes a dynamic, general equilibrium model designed to gauge the importance of contractual imperfections in the form of limited enforcement for international differences in the organization of production. In the model, limited enforcement constrains agents to operate establishments below their optimal scale. As a result, economies where contracts are enforced more efficiently tend to be richer and emphasize large scale production. Calibrated simulations of the model reveal that these effects can be large and account for a sizeable part of the observed differences in the size distribution of manufacturing establishments between the United States, Mexico and Argentina.

Author(s): C. Fritz Foley, Paul Goldsmith-Pinkham, Jonathan Greenstein, Eric Zwick

Journal: National Bureau of Economic Resarch

Abstract: Cross-listing on a U.S. exchange does not bond foreign firms to follow the corporate governance rules of that exchange. Hand-collected data show that 80% of cross-listed firms opt out of at least one exchange governance rule, instead committing to observe the rules of their home country. Relative to firms that comply, firms that opt out have weaker governance practices in that they have a smaller share of independent directors. The decision to opt out reflects the relative costs and benefits of doing so. Cross-listed firms opt out more when coming from countries with weak corporate governance rules, but if firms based in such countries are growing and have a need for external finance, they are more likely to comply. Finally, opting out affects the value of cash holdings. For cross-listed firms based in countries with weak governance rules, a dollar of cash held inside the firm is worth $1.52 if the firm fully complies with U.S. exchange rules but just $0.32 if it is non-compliant.

Author(s): Nathan Nunn

Journal: The Quarterly Journal of Economics, Vol. 122, No. 2, Pages 569-600, May 2007

Abstract: Is a country's ability to enforce contracts an important determinant of comparative advantage? To answer this question, I construct a variable that measures, for each good, the proportion of its intermediate inputs that require relationship-specific investments. Combining this measure with data on trade flows and judicial quality, I find that countries with good contract enforcement specialize in the production of goods for which relationship-specific investments are most important. According to my estimates contract enforcement explains more of the pattern of trade than physical capital and skilled labor combined.

Author(s): Titman, Sheridan; Twite, Garry

Journal: Journal of Urban Economics, Volume 74, Pages 99-112, March 2013

Abstract: This study explores the relationship between a country's legal system and how its cities develop by examining the considerable variations in commercial real estate lease duration (or term) across both countries and cities. We find that the cross-country variation in lease duration and building construction is related to the content (common versus civil law) and efficiency (integrity and enforceability) of the legal system in the respective countries. First, we find that countries with a common law system and lower levels of corruption tend to have longer leases. Second, we find that in the United States, high-rise Class A office buildings tend to have tenants with longer term leases, suggesting that the advantages associated with being able to write and enforce a long term lease is particularly important for the development of high-rise office buildings. Finally, we find that there are in fact more high-rise office buildings in countries with more efficient legal systems.

Author(s): Meghana Ayyagari, Asli Demirguc-Kunt, Vojislav Maksimovic

Journal: Small Business Economics

Abstract: This paper investigates the contribution of small firms to employment, job creation, and growth in developing countries. While small firms (<20 employees) have the smallest share of aggregate employment, the small and medium enterprise sector?s (<100 employees) contribution is comparable to that of large firms. Small firms have the largest shares of job creation, and highest sales growth and employment growth, even after controlling for firm age. Large firms, however, have higher productivity growth. Conditional on size, young firms are the fastest growing and large mature firms have the largest employment shares but small young firms have higher job creation rates.

Author(s): Kant, Chander

Journal: Journal of Policy Modeling

Abstract: Economists have recently emphasized Solow growth factors, physical capital, labor, and technology (“proximate” causes) depend on fundamentals like geography, culture, and institutions. I consider one of these fundamentals, institutions, and analyze whether they are malleable by a contemporary economic variable, globalization. The globalization I consider is of production through multinational corporations. Using the recently available data on institutional quality for almost all countries, I show institutional quality is higher with a greater FDI presence in developing countries. Nevertheless, there is no statistically significant effect on the same institutional variablesin developed countries. By some measures, the income-gap between the rich and poor countries has worsened in the post-1950 period, and a consensus has emerged that poor institutions are to be blamed. A policy of encouraging FDI islikely to have the additional effect of improving institutions in developing countries and may have a greater potential to reduce income gaps than has been realized.

Author(s): Daude, Christian 

Journal: OECD Economics Department Working Papers

Abstract: This paper takes stock of the main structural reforms that Greece has undertaken since 2010, those currently proposed and that are in the process of implementation, and quantifies the medium and long‑term effects on output. Special attention is given to three issues that are relevant to understanding reform dynamics in Greece: i) the short-term impact of reforms; ii) the effect of some reforms on income inequality and other socioeconomic outcomes; iii) implementation problems that might undermine the ability of structural reforms to deliver their expected outcomes. The reforms, if fully implemented, could raise output by more than 13% over the next decade. Reforms in product markets are particularly important in boosting growth. Poverty and inequality have increased despite policies to mitigate the social impacts of Greece’s deep depression since 2009. Better social policies are needed to strengthen the social safety net and make growth more inclusive. Much of the burden of adjustment has been borne by labour. Labour market institutions should balance the objectives of increasing jobs, reallocating workers to where they can earn the most, and ensuring the fruits of the economic recovery are widely shared.

Author(s): Chakraborty, Pavel

Journal: Journal of Comparative Economics

Abstract: Higher quality institutions help a firm to invest in institutional-dependent inputs, which might affect a firm’s performance. I use data for Indian manufacturing that matches stateby-state firm-level data with state-by-state data on particularly important institution – Judicial quality. Results show that judicial quality is a significant determinant of higher firm performance – both for exports and domestic sales. My most conservative estimate suggests that a 10% increase in judicial quality of a region helps to increase the sales of a firm by 1–2%. I explicitly control for the ‘selection’ effect by using a two-step Average Treatment Effect (ATE) procedure. The results also support my initial findings. My results are robust to a battery of robustness checks

Author(s): Carey, David; Lester, John; Luong, Isabelle

Journal: OECD Economics Department Working Papers

Abstract: Small business dynamism is a feature of an SME sector that contributes to overall productivity growth, not an end in itself. Such dynamism increases productivity growth by reallocating resources towards more productive firms and strengthening the diffusion of new technologies. Small business dynamism in Canada has declined in recent decades, as in other OECD countries, but overall it remains in the middle of the range, with some indicators above average and others below. Framework economic policies are generally supportive of small business dynamism, especially labour regulation, but there is scope to reduce regulatory barriers to product market competition. Canada has many programmes to support small businesses. Some of the largest programmes are not well focused on reducing market failures. Focusing support more on reducing clear market failures would increase the contribution of these programmes to productivity growth and living standards. This would likely entail redirecting support from small businesses in general to start-ups and young firms with innovative projects, which would boost small business dynamism

Author(s): Demirgüç-Kunt, Asli; Horváth, Bálint L.; Huizinga, Harry 

Journal: World Bank Publications

Abstract: This paper examines how the ability to access long-term debt affects firm-level growth volatility. The analysis finds that firms in industries with stronger preference to use long-term finance relative to short-term finance experience lower growth volatility in countries with better-developed financial systems, as these firms may benefit from reduced refinancing risk. Institutions that facilitate the availability of credit information and contract enforcement mitigate the refinancing risk and therefore growth volatility associated with short-term financing. Increased availability of long-term finance reduces growth volatility in crisis as well as non-crisis periods.

Author(s): Al Samman, Hazem, Azmeh, Chadi  

Journal: International Journal of Economics and Financial Issues

Abstract: This study investigates the influence of financial liberalization on economic growth in developing countries indirectly through their effect on financial development. It selects the size and activity of the financial system as indicators of financial development. The general agreement on trade and services (GATS) is a very useful option for developing countries to consolidate their financial sector reform to give foreign investors more certainty about financial investment opportunities in the economies of developing countries. This study chooses the level of commitments taking by developing countries in the GATS in banking sector as a measure of financial liberalization. The main objective is to examine the effect of developing countries financial liberalization commitments at the GATS on economic growth through their effect on the size and activity of the financial sector. According to the analysis conducted, the results show no real effect of the level of commitments taking by developing countries in the GATS on economic growth through their effect on the size and activity of financial development. Even though the effect of financial development on economic growth is positive, the effect of financial liberalization through the GATS on financial development is almost zero.

Author(s): C. Mitja Kovac, Rok Spruk

Journal: Journal of Institutional Economics

Abstract: This paper seeks to quantify the impact of transaction costs on cross-country economic growth. Our evidence from a cross-country panel data regression analysis reveals a persistent and robust negative effect of increasing transaction costs on the path of economic growth. The growth-enhancing effects of lower transaction costs are confirmed after controlling for the set of conditioning variables and further demonstrated in a cross-country growth model calibration. The results provide evidence that transaction costs might indeed be central to the study of cross-country productivity differences, suggest the importance of contractual relations and indicate their significant impact on cross-country economic performance over time.