Firm Size and Judicial Quality in Mexico

I just discovered an interesting paper by Sean Dougherty entitled “Legal Reform, Contract Enforcement and Firm Size in Mexico.”  The abstract is a little dense, so I will quote excerpts from it and the introduction to give you an idea of what Dougherty studies:

“This paper uses the variation in legal system quality across states in Mexico to examine the relationship between judicial quality and firm size. Although the country has a single legal system, its implementation and procedures vary widely, while development outcomes there are more imbalanced and unequal than in any other country of the OECD.” 

and what he finds:

“Firms in states with higher judicial quality tend to be substantially larger than those in remaining states, and this result is robust to a variety of alternative measures of firm size, as well as to instrumentation for the potential endogeneity of judicial quality. Additionally, we find that firms in more capital intensive industries are more likely to benefit from higher quality judicial systems, consistent with insights from the incomplete contracting literature, suggesting that hold-up problems may be limiting the scaling up of firms, and helping to explain the concentration of capital beyond geography.”

I’m learning that one of the main problems with entrepreneurship in Mexico is that almost all of the enterprises are tiny, meaning they can’t take advantage of economies of scale. While this paper isn’t directly about entrepreneurship, it can help to explain differences in firm size across the country.  Good news MAIS students, I just found another paper for you to read!