Industry vs Services : Do Enforcement Institutions Matter for Specialization Patterns? Disaggregated Evidence from Spain

We exploit historical differences in foral law to consistently estimate the contribution of the quality of enforcement institutions to economic specialization across Spanish provinces in the period 1999-2014. The distribution of economic activity in Spain as of today shows a strong pattern of geographical specialization. Regions less specialized in manufacturing (industry) and oriented to services sectors (Andalusia, Extremadura) in the south are compared with industrialized/manufacturing regions in the north such as the Basque Country, Navarre or Aragon. We construct province-level congestion rates across three different jurisdictions (civil, labor and administrative) from real judicial data measuring the performance of the Spanish judicial system over time, and estimate the effect of judicial efficacy on the share of manufacturing and services in the total output. Using a variety of estimation techniques, the evidence unveils strong and persistent effects of judicial efficacy on province-level economic specialization with notable distributional differences. The provinces with a historical experience of foral law are significantly more likely to have more efficient enforcement institutions at the present day. In turn, greater judicial efficacy facilitates specialization in high-productivity manufacturing while greater judicial inefficacy encourages service-intensive specialization. The effect of judicial efficacy on economic specialization does not depend on confounders, holds across a number of specification checks and appears to be causal. Lastly, the three jurisdictions seem relevant to explain specialization, although the administrative jurisdiction appears to have a more pronounced impact than the labor or civil jurisdictions