Conventional wisdom links efficient judicial systems with economic performance. Judicial systems protect property rights and contracts that allow financial markets to function and encourage firms to invest in innovations. Shorter trials decrease transaction costs that firms face. However, LSE student Giorgio Acerbi found that in the case of post-war Italy, longer civil trials correlated with faster GDP growth. Reverse causality lies at the root of this peculiar finding. Increases in economic activity caused an increase in demand for contract enforcement, which in turn led to more strain on the judicial system and longer trials.
From 1950 to 1983, the average duration of first-instance civil trials grew from 319 to 635 days. Italy’s GDP per capita grew at an average annual rate of 4.14% over the same period. Both growth and judicial inefficiencies varied widely by region. The range between the most and least efficient regional judicial system grew from 163 to 634 days. I exploit Italy’s regional heterogeneity to analyse the effect of judicial efficiency on economic performance.
Calculating Judicial Inefficiency
The Annuario di Statistiche Giudiziarie contains annual data on the number of new, closed, and pending trials in each Italian Court of Appeal District. This data can be used to estimate the duration of a civil trial in each district, by using the following approximation:
Where Pt are the number of trials pending at the beginning of year t, Pt+1 are the trials pending at the end of year t, Nt are the new trials opened in year t, and Ct are the trials closed for any reason in year t. I report the estimated duration of a civil trial in the graph below for the years 1950 to 1983. I excluded the years 1979 through 1981 due to missing data.
I estimated the effect of judicial efficiency on economic performance by regressing regional real GDP growth rates and investment rates on the estimated average duration of civil trials. I controlled for time-invariant regional characteristics and for the effect of time trends through two-way fixed-effects regressions.
The results of these two-way fixed-effects regressions reveal that an increase in the estimated average duration of first-instance civil trials appears to have a positive effect on both the GDP growth rate and the investment rate. Increasing the average trial duration from one to two years is associated with a 1.22 percentage point higher GDP growth rate and a 2.29 percentage point higher investment rate.
The Inefficient Italian Judicial System and Post-War Growth
One possible explanation of the association between growth and judicial inefficiencies is that government investment policies are the underlying driver of economic growth, which happens to occur in the same regions that have longer trials. The Italian government directed large amounts of public investment towards the southern regions, where trial duration was growing fastest, between 1950 and 1970. This hypothesis was tested by running the regressions excluding Italy’s five northern regions, which received less public investment. The new results reveal that there was a positive bias in the previous investment rate regression, but there was no effect on the GDP growth regression. Thus, bias due to omitted variables seems unable to fully explain these results.
The most plausible explanation is a combination of two factors. First, Italy’s judicial system was ineffective, so longer trials might not have harmed or impeded market functions. La Porta et al. (1998) ranked countries based on their track record of ensuring legal protections for investors. Italy ranked 48th of the 49 countries in the study. If laws are generally ineffective in protecting property rights, then a more efficient judiciary is not necessarily going to facilitate GDP growth.
Second, greater economic activity increases the need for contract enforcement and therefore may lead to more demands on the judicial system, and thus to larger backlogs and longer trials, positively biasing the regression results. The increased economic growth increased the demands placed on the judiciary system together with an Italian legal system that was generally ineffective at protecting property rights, may explain the observed positive association between the duration of civil trials and GDP growth and investment rates.
My results suggest that the effect of civil trial duration on economic performance was non-linear. The positive association between economic growth and trial length reverses to a negative association when trials last longer. Increasing the average trial duration from 2 to 3 years only increased the GDP growth rate by 0.416 percentage points and decreased the investment rate by 6.05 percentage points. This finding re-aligns the data with conventional wisdom and underlines the economic harm of inefficient judiciaries.
A Non-linearity Conclusion on Judicial Inefficiency
The ability of the judicial system to effectively enforce contracts and protect property rights is relatively unaffected by average trial duration increasing from one to two years, but more severely impaired by further increases past that threshold. This non-linear trend agrees with my assessment that the positive association between increases in civil trial duration and economic growth are the product of reverse causality bias. When trials are relatively brief, reverse-causality bias masks the negative relationship between judicial inefficiencies and economic growth, which only becomes apparent at higher levels of judicial inefficiency.
