Court Efficiency and Procurement Performance

Disputes on the penalties enforceable for breach of contract are often solved in court. Using a large dataset on Italian public procurement contracts, we study the effects of the inefficiency of the local law courts on the delay with which contractors deliver public works. First we sketch a simple model to see how inefficient law courts - i.e. those characterized by longer average duration of trials - may induce public buyers to refrain from enforcing penalties for late delivery in order to avoid costly disputes in court. Then our empirical findings show that, where the local law courts are inefficient: i) public works are delivered with longer delays, and this applies particularly to higher-value contracts - i.e. complex projects; ii) contracts are more often awarded to larger firms; and iii) on average, a higher share of final payment in contracts is adopted. These results are not driven by omitted environmental variables, since we show that delays in the completion of contracted works are still a selected by the efficiency of the local law courts after including province-related fixed effects in the model and considering other possible explanations for our findings.