The Degree of Judicial Enforcement and Credit Markets: Evidence from Japanese Household Panel Data^*

Abstract

The length of trials in Japan has become shorter over time. Theory predicts that better judicial enforcement (i.e., faster court proceedings) will decrease the probability of being credit rationed, increase loan size, and increase the probability of bankruptcy. Our estimation results based on micro data from a panel survey of consumers in conjunction with judicial data by court district show that better judicial enforcement increases the probability of being rationed in some cases and decreases loan size (contrary to expectation) but increases the probability of bankruptcy (as expected). Thus, better judicial enforcement facilitates the recovery of loans but may be socially harmful.

The Role of Justice in Development: The Data Revolution

“…However, caution must be exercised in examining how increasing competition among lenders ultimately affects borrowers' welfare, which would depend on the presence of well-developed insurance markets. The papers that address this issue (Horioka and Sekita, 2011;T. J. Besley, Burchardi, and Ghatak, 2012;Kranton and Swamy, 1999) present cautionary evidence regarding the effects of competition between lenders on credit outcomes.…”

“…However, it lowered farmers' welfare by reducing the lenders' ability to underwrite farmers' investments during bad shocks. Horioka and Sekita (2011) use a panel survey of consumers in conjunction with judicial data by court district in Japan to estimate that better judicial enforcement increases the probability of being rationed in some cases and decreases loan size (contrary to expectation) but increases the probability of bankruptcy (as expected). Thus, the authors argue that better judicial enforcement facilitates the recovery of loans but may sometimes be socially harmful.…”