Misallocation in the Market for Inputs

This project aims to study how slow legal enforcement due to congestion of the courts shapes the organization of production, and to quantify the importance of these frictions for productivity.

The last two decades of research have found that legal institutions play a key role for development. That said, the exact mechanisms and their relative importance are not yet clear. Enforcement frictions lead to transaction costs, which result in lower input shares. The project’s focus is on the use of intermediate inputs in the production process. Barriers in the access to intermediate inputs (partially completed products ready for further processing) lead firms to perform more of the production process within the firm, which may be inefficient. The presence of input-output linkages amplifies these distortions and could lead to big welfare losses (i.e. decreased economic well-being caused by market distortions). Quantifying these welfare losses enables us to put a lower bound to the benefits of court reform.  The study will apply these topics to the case of India, using prior data on the formal manufacturing sector and newly collected data on backlogs of cases in district courts acquired from the eCourts website, a public online platform set up by the Indian Supreme Court for citizens.

The empirical section of the paper will study the correlation between district-level court quality and intermediate input use. Data from the eCourts website will be scraped to assemble district-level data on courts ourselves on the age and number of pending cases from this website and calculate the average speed of enforcement by court or district. First firms’ patterns of intermediate input use and how they correlate with institutional quality will be documented. Second, a general equilibrium model based on Oberfield (2013) will be employed to identify the role of transaction costs imposed by weak legal institutions from the joint moments. These two steps will allow the researchers to study the welfare gains when enforcement frictions are reduced.

India’s policymakers have long been aware of the huge backlogs of cases in their courts and there have been various attempts to speed up the working of the judiciary. This project can help the reform process by simplifying the cost-benefit analysis for future reforms. The data collection effort is also a relatively simple undertaking that will yield detailed information on court backlogs, addressing a lack of data on arrears identified by the Law Commission of India