Law and Finance Matter: Lessons from Externally Imposed Courts

Abstract

This paper provides novel evidence on the real and financial market effects of legal institutions. Our analysis exploits persistent and externally imposed differences in court enforcement that arose when the U.S. Congress assigned state courts to adjudicate contracts on a subset of Native American reservations. Using area-specific data on small business lending, we find that reservations assigned to state courts, which enforce contracts more predictably than tribal courts, have stronger credit markets. Moreover, the law-driven component of credit market development is associated with significantly higher per capita income, with stronger effects in sectors that depend more on external financing. Disciplines

Growing Up without Finance

“…Brown, Cookson, and Heimer (2017) find that several key indicators of subsequent banking market development are significantly greater on reservations with state courts, including the propensity for banks to extend credit and the extent of bank branching activity. For example, their estimates suggest state court jurisdiction led to approximately 20 percent more community bank branches per capita.…”

“…Brown, Cookson, and Heimer (2017 , Table 1) use hand-collected 9 The 1968 Indian Civil Rights Act also allowed for retrocession of PL280 authority, but the process for retrocession of state court authority to tribal courts is difficult to initiate by tribes. Thus, there were few instances where tribal court authority was regained.…”

“…Thus, there were few instances where tribal court authority was regained. We account for retrocession in our main measure, as well as robustness to alternatives in related work (Brown, Cookson, and Heimer, 2017). data from the 1952 edition of Polk's Bank Directory (Polks) to construct county-level measures of banking activity (bank assets, bank loans, and total number of branches for banks headquartered in the county).…”

“…The closest paper is Brown, Cookson, and Heimer (2017), which finds that stronger contract enforcement from PL280 led to an expansion of small business lending and bank branching on reservations, and that these effects translate into higher economic output in finance-dependent industries. The present paper shows that the variation in financial development across reservations documented by Brown, Cookson, and Heimer (2017) has important effects on consumer financial behavior.…”

Neighborhood Racial Characteristics, Credit History, and Bankcard Credit in Indian Country

“…Similar concerns have been raised about access to and usage of consumer credit, including bankcards, for American Indians and American Indian communities-"America's domestic emerging market" (Clarkson 2009: 287)for which research has been particularly scarce even though undersupply of credit had been identified as a key obstacle to economic progress of American Indian reservations (see, e.g., Community Development Financial Institutions Fund 2001, Parker 2012, Brown et al 2015. 3 Using SCF data, Crook (1996: 482) …”