One of the oldest and most important questions in economics is, “Why are some countries rich and others poor?” Scholars have proposed numerous explanations for what increases a country’s level of economic wealth, including free trade, more investment, temperate climate, good health, high education, financial market development, and good government. Historically, empirical studies of aggregate economic growth have studied country-by-country differences. With so many proposed explanations, understanding which factors cause greater wealth has proven difficult.
Recent research by Leeds Finance faculty member, Tony Cookson and his co-authors takes a different approach to this classic question – studying what determines wealth across Native American reservations. Specifically, Cookson and his co-authors study a 1953 law that assigned state courts to some (but not all) reservations. They found that reservations under state courts exhibit strikingly stronger economic performance. Digging deeper, they show that state courts encourage more lending by providing stronger contract enforcement. The additional lending facilitates productive investments, particularly in sectors that rely on debt, and over the six decades since the law passed large differences in income emerged for this reason. The study provides fresh evidence that good contract enforcement is important for economic development.
Brown, James R.; J. Anthony Cookson and Rawley Z. Heimer. “Law and Finance Matter: Lessons from Externally-Imposed Courts.” Review of Financial Studies. Vol 30, No. 3 (March 2017), pp. 1019-1051.