Super Partes? Assessing the Effect of Judicial Independence on Entrepreneurship

We study whether judicial independence from business interest groups promotes entrepreneurship. We argue that more judicial independence, by ensuring that courts do not favor connected parties in business disputes, induces more entry of new firms, as they face a lower risk of expropriation by powerful incumbents. In turn, this triggers the exit of established and less efficient firms, and, as a result, enhances the overall economy. In order to identify the effect of judicial independence on the outcomes of interest, we exploit exogenous longitudinal variations in the judicial selection system in U.S. states between 1977 and 2011. Empirical results broadly support our hypotheses.