An inefficient court system tanks the economy

2 THEORETICAL BACKGROUND AND LITERATURE REVIEW 2.1 Linkages between judicial efficiency and economic activity A large strand of the literature provides empirical evidence of a strong positive relationship between judicial efficiency and various aspects of economic performance, such as firm size, foreign direct investments, investment and credit supply, which, in turn, support economic growth. The first pillar of the literature examines the relationship between the efficiency and quality of judicial systems with the firms' size and productivity. In general, an increase in the average size of firms implies productivity gains for the economy, fostering growth dynamics through the enhancement of scale economies. According to Lorizio and Gurrieri (2014), an inefficient judicial system may have adverse effects on several areas of businesses' performance, hampering employment decisions (through failures in the enforcement of the employment legislation) and investment plans (through failures in the contract enforcement) affecting negatively firms' size. Kumar et al. (2001) corroborate a positive relationship between the judicial efficiency and the average firm size, especially for the lower capital-intensive firms. Beck et al. (2006) provide evidence of a positive relationship between the protection of property rights and the firms' size. Chakraborty (2016), using data for Indian manufacturing, provides evidence that judicial quality is positively related to businesses' performance. Chemin (2020) suggests that judicial reforms financed by foreign aid agencies have positive effects on firms' perceptions about judicial efficiency, leading to significant gains in firms' productivity. Several country-specific studies confirm the positive implications of a well-functional justice system to the firm size. Laeven and Woodruff (2007) find that the Mexican states with more efficient legal systems exhibit larger firms, mainly through a lower idiosyncratic risk faced by entrepreneurs, facilitating the smooth completion of their investment plans. García-Posada and Mora-Sanguinetti (2013) confirm this positive relationship between firm size and judicial efficiency in Spain. Giacomelli and Menon (2013) show that a reduction in trial length leads to an increase in the average Italian firm size. Ippoliti et al. (2015) find that judicial efficiency lowers market uncertainty and supports entrepreneurship. A second pillar of the related literature focuses on the effect of judicial efficiency on foreign direct investment (FDI). Foreign equity financing via FDI inflows is considered one of the major sources of capital inflows, fostering growth perspectives through the acceleration of technological progress and the adoption of innovative production techniques. Benassy-Quere et al. (2007) examine the role of institutions in the host and the source country of FDI flows for OECD countries, providing evidence that more efficient protection of civil and property rights, among others, tend to increase FDI inflows. Lorenzani and Lucidi (2014) suggest that improvements in judicial efficiency may profoundly affect business activity and FDI. Comi et al. (2019) and Tag (2021) provide evidence of a positive relationship between judicial efficiency and attractiveness to FDI in Italian municipalities and in developing economies, respectively. The third pillar of the related empirical literature is oriented toward the effects of inefficient justice systems on credit provision. Borrowing restrictions and increases in the cost of lending due to inefficiencies of justice undermine growth perspectives. As Djankov et al. (2008) point out, debt financing is a crucial determinant of economic performance, allowing businesses to finance their investment plans and households to underpin their consumption expenditure. La Porta et al. (1997) find that the legal environment has positive effects on capital markets across countries. Levine (1998) provides evidence that countries with legal codes that protect creditors' rights, highly dependent on the legal origin, are characterized by more developed banking systems. Chemin (2009) examines the effect of the speed of decision-making in judicial system upon several aspects of economic activity in India, such as loans' market and agricultural and manufacturing production. Laeven and Majnoni (2003) suggest that efficiency-enhancing judicial reforms achieve better enforcement of contracts, decrease interest rate spreads across countries, and the cost of borrowing, facilitating the attraction of new investment. Djankov et al. (2008) show that more efficient debt enforcement of contracts is associated with improvements in debt markets, as measured by the ratio of private credit to GDP, as well as that the legal origin plays a crucial role in the efficiency level of debt enforcement. Bae and Goyal (2009) provide evidence that weak contract enforcement is related to compressed loan provision and elevated interest rates. Several studies confirm the negative consequences of inefficient judicial systems on debt financing at a country level (e.g., Jappelli et al., 2005, for Italy and Fabbri, 2010, for Spain). To recapitulate, judicial efficiency plays a crucial role in strengthening economic growth through the attraction of fresh investment, the upholding of the firm growth and productivity gains and the finance of businesses activity through credit. However, there are also several fundamentals that shape the relationship between efficiency and growth. These conditions that determine the magnitude of the effect of judicial efficiency on economic growth are discussed in the following section.