Does judicial efficiency improve productivity? Evidence from Italian farms

Economic literature shows that credit constraints have a negative impact on farm performance. The problem of credit constraints is particularly severe for the Italian agricultural sector given the structure and the legal status of most farms. The difficulties in providing collateral is even greater in the case of sole holders who represent almost 96% of whole Italian farms due to the direct link between farm and private capital. Credit market performance may be affected by judicial efficiency that guarantees the enforcement of contracts. We use court judicial efficiency as an instrument and exploit the great heterogeneity in efficiency of Italian courts across time and provinces to estimate the causal impact of credit constraints on farms’ productivity. We find that less credit constrained farms have a higher Total Factor Productivity. We also find that Italian farms, when faced with a less efficient judicial system, are less credit constrained, probably because banks tend to grant mainly subsidized loans.