Arbitration is No Substitute for State Courts

It is often conjectured that non-state dispute resolution blossoms when state courts are not independent or are perceived as low quality. This conjecture implies a substitutive relationship between state and non-state dispute resolution. This is the first study that puts these hypotheses to an empirical test. We estimate a multilevel model based on more than 10,000 surveyed firms in some 50 countries. We find that perceived quality of state courts and the frequency with which firms resort to non-state dispute resolution are positively correlated and that, hence, state courts and non-state dispute resolution are complements, rather than substitutes. The hope of some policy-makers that development can be spurred by improving the conditions for non-state dispute resolution thus appears to be in vain.