Research

Judicial decisions can have far-reaching effects beyond the immediate litigants, influencing how banks allocate credit and impacting the real economy. Exploiting the random assignment of judges in Brazilian local courts, we show that banks reduce lending after losing lawsuits decided by pro-debtor judges. These contractions disproportionately affect small firms with existing bank relationships, limiting credit renewal and reducing employment. Our results reveal a novel channel through which judicial discretion shapes the real economy and highlight that policies to strengthen credit markets must go beyond usual institutional reforms to account for judges’ behavior.

This paper studies the regional reallocation of credit through bank branch networks following Brazil's trade liberalization and its impacts on local labor markets. Regions more exposed to tariff reductions experienced capital outflows, while those financially connected to hard-hit localities saw increased credit availability and employment growth in the non-tradable sector. This dynamic highlights the role of financial integration in shaping spatial adjustment and underscores the importance of credit in facilitating the reallocation of displaced workers. The observed outflow of credit from adversely affected regions provides direct empirical support for capital adjustment as a key mechanism behind the growing and persistent regional effects of trade liberalization, as suggested in prior work.