The Relevance of Judicial Procedure for Economic Growth

It has been argued that procedural formalism undermines economic efficiency by fostering rent-seeking and corruption. We challenge this view by arguing that a number of judicial procedures foster economic growth by increasing the predictability of court decisions, which leads to more transactions and higher investment levels. We investigate the effects on economic growth of 15 judicial procedures. Employing a standard growth model, we find in a cross-section of 67 countries that timeliness, written—as opposed to oral—procedures, and the right to counsel have a positive effect on growth, whereas the number of independent procedural actions as well as the presumption of innocence have negative effects. Our results partially contradict the results of former studies based on the Lex Mundi dataset. Key Terms: Judicial procedure, legal formalism, judicial Independence, rule of law, investment, growth. JEL classification: H11, K40, 040, P51 * Philipps-University Marburg, Faculty of Economics and Business Administration (FB 02), Universitaetsstr. 24, D-35037 Marburg, Germany, Phone: +49-6421-2823091, Fax: +49-6421-2823088, Email: [email protected]. ** Philipps-University Marburg, Faculty of Economics and Business Administration (FB 02), Barfüßertor 2, D-35032 Marburg, Germany, Phone: +49-6421-282 3080, Fax: +49--6421-282 8974, Email: [email protected]. The authors thank Anne van Aaken, Matthias Dauner, Nora El Bialy, Aleksandra Gauss, Peter Nannestad, Sang Min Park, and Katharina Stepping for helpful comments. Previous versions of the paper were presented at the annual meetings of the American Economic Association (Chicago 2007), the European Association of Law and Economics (Copenhagen 2007), the Money, Macro, and Finance Group (Birmingham 2007), the Workshop on Measuring Law & Institutions (Paris 2007), the European Public Choice meeting (Jena 2008), and at research seminars at the Universities of Brussels and Gießen.