David Schoenherr, Seoul National University Business School
Jan Starmans, Stockholm School of Economics
Abstract: In this paper, we examine the impact of legal uncertainty on economic activity. We develop a model that distinguishes between two types of legal uncertainty: idiosyncratic (diversifiable) and systematic (nondiversifiable), both of which can reduce economic activity. We test the model's predictions using micro-level data on bankruptcy judges and corporate loans in Korea. Exploiting random assignment of cases to judges and exogenous judge rotations in the judicial system, we compute time-varying court-level measures of debtor-friendliness and legal uncertainty as perceived by debtors and creditors. Our results show that firms tend to file for restructuring in courts with higher levels of debtor-friendliness and lower levels of legal uncertainty. We also find that higher legal uncertainty decreases the size of credit markets, predominantly for high-risk firms. Our analysis further indicates that credit supply is less sensitive to idiosyncratic sources of legal uncertainty than credit demand, as banks can better diversify idiosyncratic legal uncertainty.
Abstract: How efficient is the U.S. patent litigation system? We quantify the extent to which the litigation system shapes innovation using a novel dynamic model, in which heterogeneous firms innovate and face potential patent lawsuits. We show that the impact of a litigation reform depends on how heterogeneous firms endogenously select into lawsuits. Calibrating the model, we find that weakening plaintiff rights through fewer defendant injunctions increases firm innovation and output growth, improving social welfare by 3.32%. Raising plaintiff pleading requirements, which heightens barriers to filing lawsuits, likewise promotes innovation, boosts output growth, and enhances social welfare.
Discussant: Gustavo Manso, University of California-Berkeley
Abstract: Does reducing the cost for entrepreneurs to write more complete contracts with their financiers enhance entrepreneurial success? To shed light on this question, this paper exploits a 2008 French reform that made it less costly for new firms to choose a legal form allowing more complete financial contracts (``flexible bylaws''). Using comprehensive tax-filing data from 2004 to 2015, we analyze the reform's effect on new and existing firms. Our results show a marked increase in the adoption of flexible bylaws among new firms, leading to higher growth in capital, labor, and revenues in the first three years after creation. The effects are more pronounced for firms with high marginal returns to capital, suggesting that the reform leads to an efficient allocation of capital. Our findings highlight the significant role of legal and financial structures in entrepreneurial success, which has policy implications for promoting entrepreneurship.
Discussant: Mark Garmaise, University of California-Los Angeles
